Hendren Global Group
Japan’s economy versus the U.S. economy
The below graph reflects trends in Japan’s gross domestic product (GDP) measured in U.S. dollars as of 2005 and 2013. Japan’s Gross Domestic Product (GDP) in 2012 was approximately $6 trillion USD, versus the U.S. GDP of approximately $16 trillion USD (so Japan’s economy is approximately 38% the size of the U.S. economy). Japan’s population is approximately 128 million people, versus the U.S. population of 316 million people (so Japan’s population approximately equals 40% of the U.S. population, on a land mass 11% smaller than California).
Japan’s pre-2012 GDP was stable despite a strong yen
As we noted in the prior graph in Part 1, during the 2002–2008 business cycle, Japanese merchandise exports nearly doubled, mitigating the effects of a weak and deflationary domestic economy. The question is, can the Japanese export machine repeat its 2002–2008 performance in 2013–2018 and reinvigorate its lethargic and debt-laden domestic economy?
Bear in mind that the exchange rate of the Japanese yen in 2005 was around 120 per dollar. The yen subsequently strengthened to record highs of around 80 yen per dollar by the end of 2012, putting intense pricing pressure on domestic Japanese production. The effects of both the strengthening yen and modest growth in exports post-2008 reflect in the above graph describing Japan’s nominal GDP.
These developments have significant implications for the future trends in Japanese equity markets in relation to its regional export competitors of China and Korea.
While it might seem overly optimistic and simplistic to suggest that Japan can replicate its 2003–2008 export growth trajectory in the current business cycle, there are a variety of important changes in the global macro economy that could make this feat possible. We’ll explore those particular factors in further detail as we continue this series.