Japan may lose pole position in global stocks

Fri Jul 12, 2013 8:38am EDT
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By Natsuko Waki

LONDON (Reuters) - Japan may lose this year's top billing on global stock markets as a boost from a weakening yen is likely to wane in a country where exports make up less than a seventh of total economic output.

The correlation between a falling currency and rising local stocks has already dropped back from its peak and the equity market may require a strong pick-up in domestic demand to drive further gains from here.

The "Abenomics" policy agenda pushed by Japanese Prime Minister Shinzo Abe - a mix of monetary easing, stimulative spending and growth-inducing steps - has driven the yen lower and propelled the stock market past those in other developed countries.

Well-known brands of Japanese cars, televisions and games consoles support a popular belief that Japan is an export-oriented economy which would benefit from a weaker currency.

Yet goods exports in fact account for only 13.5 percent of gross domestic product, almost the same as the euro zone and not much more than the 10 percent in the United States, according to data from the IMF and JP Morgan.

Moreover, companies on the MSCI Japan index derive 35 percent of sales revenues from abroad, less than 40 percent for the United States and 66 percent for Europe.

"It is a surprise we have this perception that it's an export-oriented economy... Maybe there's overemphasis on the significance of the yen on the equity market," said Dan Morris, strategist at JP Morgan Asset Management.

"It's reasonable to expect the correlation to weaken once people become less obsessed with Japan. Then we go back to (companies) having to improve profitability and domestic revenue growth because it's not going to be enough just to have the currency depreciate."   Continued...

Japan's Prime Minister Shinzo Abe, who is also leader of the ruling Liberal Democratic Party, speaks to voters during a campaign for the July 21 Upper house election in Tokyo July 4, 2013. REUTERS/Toru Hanai