Tuesday, September 12, 2006

Japan Part Deux

If I could impart anything on this blog, it is thinking outside of the box or questioning mainstream thought. I'm never going to share proprietary secrets but I will share ideas, facts or data which will stimulate your own discovery process. Not necessarily that everything I post are unquestionable facts, because they won't be. Nor is everything others post.

Along those lines, a month or so ago I wrote that the deflationary cycle in Japan was in jeopardy of restarting or worse, that it had never actually been beaten as so many are so quick to claim. Six months ago many of the most defensive on Wall Street were still recommending Japan. I viewed and still view Japanese equities as a risky investment. Yet, I also view Japan as the economic jewel of Asia and I fully expect it will remain so for quite some time. Listen folks, if it was a forgone conclusion population size led to economic might, China, India, Indonesia and the Soviet Union would have ruled Asia and the world for the last three hundred years and more. It's not a guarantee China can transition from a corrupt, communist, centrally planned cheap labor pool for the world to a democratically elected pre-eminent economic, technological and industrial power like Japan. It's highly likely they have turned the corner in many respects but China has more challenges than America did in the 1920s.

Yesterday it was reported that machine orders literally fell off of a cliff in Japan. Fell off of a cliff. They sank the most in twenty years at nearly -20%. Twenty years? Guess when the deflationary cycle started in Japan? Where was this information reported? Well, amongst other places, Finfacts, a site I highlighted as a top site I visit daily and superior site to any free site I have found in the US. Frankly, Finfacts has more of what I want to read than the Wall Street Journal, Barron's or many other pay sites. In a global economy, I cannot stress enough how one must watch the world events and economic activity outside of the US. The US press is too focused on events within our borders yet 75% of global GDP and 95% of the world's population is outside of the US. International investors understand this.

So, in a domestically driven economy, Japan's machine order shortfall wouldn't necessarily pose a serious problem. Yet, Japan's massive industrial and technology base derives a disproportionate amount of sales via export. So, in a recession, where the underserved consumer sector sees a reallocation of capital as the industrial sector cleanses itself, Japan's consumer sector is simply not large enough to offset the oversized industrial sector investment losses. Japan's deflationary cycle is not over and the Bank of Japan never should have raised rates. It is my belief this is not an inflationary world.
posted by TimingLogic at 9:58 PM