Japan's GDP Jumps 3.7% in Face of Low Expectations and Troubled U.S. Market

By Jason Simpkins
Associate Editor

The Japanese economy defied expectations - and a weak U.S. market - to grow at an annualized rate of 3.7% in the fourth quarter, the Cabinet Office said yesterday (Thursday).

"The GDP number was a big, positive surprise to the market," Takehiro Sato, chief economist for Japan at Morgan Stanley (MS) Japan Securities, told the International Herald Tribune.

Japan's Nikkei 225 Stock Average experienced its largest gain in six years as a result, jumping 4.3% to 13,626.45.

The driving force behind the growth was the strong rise in capital investment. The amount spent on factories and facilities by Japanese companies rose 2.9% in the quarter ended Dec. 31, well exceeding analysts' expectations of 0.9%. Capital spending added 0.5% to quarterly growth, even as the United States faltered.

"Yes companies are worried about the U.S., but they're still investing," Jim Lambregts, head of Asia research at Rabobank International in Hong Kong, told Bloomberg News. Lambregts also pointed out that the Bank of Japan's quarterly business survey showed that companies planned to increase spending, and "this confirms that people are putting their money where their mouths are."

In addition to heavy capital investment, exports to markets throughout Asia and the Middle East climbed to record highs, offsetting a U.S. slowdown. Exports rose 2.9% from the previous quarter. Net exports, the difference between exports and imports, contributed a 0.4% to growth.

Growing consumer classes throughout Asia now account for half of Japanese exports, Takuji Okubo told IHT. Exports to the Middle East grew 37.8% annually on a customs cleared basis in 2007, while exports to Russia rose 54.1%, Okubo said. Exports to the United States fell 0.2%.

"The U.S. still matters but there's a more balanced source of demand than there was 10 years ago," David Cohen, director of Asian forecasting at Action Economics in Singapore, told Bloomberg. "That's a reason not to be pessimistic about Japan."

According to Money Morning Investment Director Keith Fitz-Gerald, Japan is a "classic ‘Because of China' investment play." The Japanese economy is the largest economy in Asia, and far more liberal, transparent, and reliable than China's.

"Japan is China's secret back door," Fitz-Gerald said in an interview. "It has a terrific amount of access to the Chinese market, and Japanese companies have demonstrated a lot of aptitude in exploiting that."

Mitsui & Co. Ltd. (MITSY), Japan's second biggest trading company, posted revenue growth of 12% in the October-December quarter. The company said profit surged 37% in the final nine months of 2007. Rising crude oil and commodity prices helped the company soar to a record net profit of $3.1 billion, compared to $2.3 billion in the same period last year. Mitsui continues to expect a net profit of $3.9 billion this fiscal year.

Profits at Toyota Motor Corp. (TM) have also been accelerating. The company posted a 7.5% rise in profit for the quarter ended Dec. 31. Its sales growth in emerging markets - including China, Africa, South America and Europe - more than made up for declines in North America, where sales dropped by 8,000 vehicles from a year earlier. Toyota's group profit for the quarter ended Dec. 31 rose to $4.29 billion and quarterly sales rose 9.2% to $62.79 billion.

The iShares MSCI Japan Index ETF (EWJ) is another way to ensure your portfolio is properly positioned to capitalize on Japan's market growth. The fund seeks to replicate the movements of the Japanese market. According to Fitz-Gerald, it's "an excellent way to throw a broad net over those companies doing well."

[For a related story on Japan's surprise GDP report in today's issue of Money Morning, please click here].

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