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Why You Need to Keep Your Money Out of JapanBy George Leong for Investment Contrarians | Nov 16, 2012

Japan continues to be in an economic abyss, void of any gross domestic product (GDP) growth. There’s minimal growth and the country is mired in a multi-decade-long comatose state; it requires major resuscitation. Despite producing some of the top brands in the world in electronics and cars, along with an efficient workforce and technological innovation, Japan’s GDP growth contracted 0.9% in the third quarter, or 3.5% on an annualized basis, and appears set for another recession since GDP growth is estimated to fall in the fourth quarter. (“Japan Economy Shrinks 0.9% in Third-Quarter, Points to Recession.” CNBC via Reuters, November 12, 2012.)

The problem is that Japan’s government has pushed expansive fiscal and monetary policy to try to re-ignite what used to be the pearl of the orient; but so far, it has probably helped to prevent a deep recession, rather than drive GDP growth.

The country’s interest rates are already at zero, so there’s little space to maneuver. Given that interest rates have been at zero percent since 2010, the failure of the country to rebound is puzzling. Consider that the high point for interest rates since 2005 was a rate of just over 0.5% in 2007. (Source: “What is the Japanese yen (JPY)?,” GoCurrency, last accessed October 22, 2102.) That’s seven years with extremely low interest rates and not much has improved with the country and GDP growth.

Some argue that Japanese banks could be looser in their lending policies, but this could lead to some potential credit issues down the road. Just think of what happened here.

The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) came in at a dismal 18-month low of 46.9 in October. It was the fifth straight month of contraction.

If I was a betting man, I would not bet my money on a turnaround coming soon for Japan.

There is declining consumer spending, and exports continue to falter due to the financial crisis and muted growth in Europe, along with Japan’s current issues with China over a small group of bordering islands. (Speculation is that there is oil near the islands.)

In September, Japanese exports fell 10.3% year-over-year with the deficit rising to around $7.2 billion, according to Japan’s Finance Ministry. (Source: “Japan trade hit by Europe crisis, China tensions,” Associated Press, October 22, 2012.)

From 1981 to 2010, Japan’s average GDP growth was 2.2% with a high of 9.4% in March 1988, according to the World Bank. But this seems to be in the distant past, based on the soft projections going forward.

In the following chart, take a look at the comparative GDP growth over the past five years between China and Japan, and notice the significant difference in GDP growth.

China and Japan: Comparative GDP Growth

                Copyright Lombardi Publishing Corporation 2012;data source: The World Bank, last accessed November 15, 2012

Japan is blaming the stagnant GDP growth on the stalling in Europe, and the high level of the yen and its impact on exports. The higher value of the yen makes business tough for Japanese exporters, and it is preventing an export-led recovery for the Japanese economy.

And just like the U.S., Japan’s GDP growth is driven by domestic private consumption that accounts for about 60% of the economy versus about two-thirds for the U.S.

The problem is that consumer spending is down, as the country’s unemployment rate hovers at over four percent. In 1980 and 1990, a mere two percent were unemployed, according to GoCurrency.

I’m not optimistic that a turnaround will occur. My advice is to stick with China, South Korea, Malaysia, and Singapore.

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