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Lisa Twaronite's This Week in Japan
Feb. 16, 2011, 1:58 a.m. EST
View all Lisa Twaronite's This Week in Japan "º
"¹ Previous Column
Japan has reason to watch China inflation data
First Take "º
Borders' bankruptcy news is no surprise
By Lisa Twaronite, MarketWatch
TOKYO (MarketWatch) "” How much of the money that was recently sloshing around in emerging markets is now coming to Tokyo shares "” and how much of it will stick here for a while?
The answer to the second question depends on whether Japan's nascent, export-led recovery will stay on track, if exchange rates will stay stable, and "” in the longer term "” on how the country approaches its perennial problems like an aging population and mounting public debt.
The answer to the first question is that equity inflows have increased this year, and some are saying this could continue for a while.
Data firm EPFR Global said in a report earlier this month that outflows from emerging-market equity funds were the strongest in three years in the week ending Feb. 2, as "investors continued taking last year's gains and putting them to work in the U.S., Japan and other developed markets."
As of that week, Japan equity funds took in fresh money for the 10th week in a row, EPFR said.
Much of the reversal was due to unrest in parts of the developing world, which spooked investors. Widespread antigovernment protests in Egypt led to the departure of President Hosni Mubarak. Food riots also erupted in Algeria and Tunisia last month, and protests have since spread to Iran and Bahrain.
Japan and India signed a free-trade agreement to do away with tariffs on most trade between the two as they seek to bolster efforts to counter China's expanding economy.
But part of it was due to the fact that Japan is looking a bit better these days.
On Monday, data confirmed that as expected, Japan's economy was smaller than China's last year, meaning it lost its No. 2 ranking after the U.S. to its Asian neighbor. Read more on Japan GDP data.
But the same data showed that Japan's real gross domestic product expanded 3.9% for the year, despite a contraction in the fourth quarter "” which itself was smaller than expected.
Then on Tuesday, the Bank of Japan upgraded its overall assessment of the economy on improving trends in exports and industrial output. Read more on Bank of Japan upgrade.
"As the growth rate of the global economy has started increasing again, led by emerging and commodity-exporting economies, Japan's exports and production are showing signs of resuming an uptrend," the central bank said in a statement.
Deflation "” the year-on-year rate of decline in the consumer price index "” was "expected to continue slowing," but there was a "possibility that inflation will rise more than expected," if commodity prices increase further, the bank said.
As for that stubbornly strong yen, after it's run-up in 2010, it hasn't budged much this year, either way. The dollar's been trading in a narrow range under ¥85.00.
Japan owes much of its recovery to China, and investors haven't failed to notice this. In other words, they recognize that Japan offers exposure to Asia's rough-and-tumble growth story through a prism of price and currency stability.
"Given Japanese companies' strong trade and investment linkages in Asia, the Tokyo market offers excellent opportunities to participate in continued rapid Asian growth without incurring inflation or "” in the near term "” significant exchange rate risk," said Uwe Parpart, chief Asia economist at Cantor Fitzgerald in a note to clients Monday.
He said there's "no one-to-one relation between money leaving emerging Asia and money being put to work in Japan," but all that money has to go somewhere.
"Korea, Taiwan, India, and Thailand, combined, saw outflows of nearly $5 billion from their equity markets last week alone, while Japan has not had a net outflow week so far this year and is by far the best-performing Asian equity market year-to-date," Parpart said, adding: "I see no near-term change to this picture and expect continued Japan outperformance."
As of Wednesday, the Nikkei Stock Average /quotes/comstock/64e!i:ni225 (JP:NI225 10,808, +61.62, +0.57%) was up 5.7% year-to-date at a nine-month high above 10,800, and the broader Topix was up 7.6% year-to-date.
To be sure, Japan is far from immune to imported inflation, given that it imports most of its food and energy needs.
Corporate profits could take a hit unless companies are able to pass their higher costs on to consumers. And if they do, consumers' real income will take a similar hit, and sagging domestic consumption could sink the export-led recovery.
But unless that happens "” or the yen starts twitching again "” there are probably worse countries in which to park your money right now.
Lisa Twaronite is MarketWatch's Tokyo bureau chief.
The bankruptcy filing of Borders Group Inc. is no surprise, as electronic commerce sweeps brick-and-mortar operations away, writes Jon Friedman.
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