Japan's Election Looms Large for the Nikkei's Future

Japan's Election Looms Large for the Nikkei's Future

It's a big week across the Pacific in Japan. Parliamentary elections on Sunday could give Prime Minister Shinzo Abe's Liberal Democratic Party serious strength as Japan's governmental leader attempts to continue the economic rise he's birthed in an economy that has known stagnation for two decades. Expectations of the election helped the Nikkei gain 0.8% this week, part of the index's unrivaled 38% year-to-date gains. Can Japan keep up this surge?

Abe's time to shine
No doubt Abe's loose monetary policy in the first half of 2013 has driven Japan's stocks to world-leading gains, but the prime minister could have even more control if the LDP gains control of both houses of Japan's parliament on Sunday. That hasn't happened in more than 20 years, but with many in Japan looking for a longer-ruling leader after several short periods of leadership by recent prime ministers, Abe's chances at a unified government look good.

What's that mean for the yen, the currency that investors' eyes around the world have tracked this year? Abe's committed to weakening Japan's currency and a united government will give him an unblocked path to pushing his aggressive economic agenda. The yen gained against the U.S. dollar and other currencies this week ahead of the election, although Japan's currency is still hovering at more than 100 yen to the dollar, a sharp drop compared to last year's strong exchange rates.

As long as the yen keeps dropping, investors in Japan's leading exporters will have plenty to cheer about. Japanese tractor and equipment manufacturer Kubota's shares fell by more than 2.4% this week after cautious investors reeled in profits ahead of the election, but Kubota and other leading Japanese manufacturers that engage in significant overseas business will be set to flourish if Abe's unified government comes to fruition.

Kubota's presence in the U.S. will be all the more valuable as long as the yen keeps falling against the dollar -- and the company's already facing benefits as leading rival Deere's utility tractor sales remained flat through May, underperforming the industry's 4% growth in the segment. While Kubota has a lot of ground to make up to stack up against an industry titan like Deere, a weak yen and worse-than-expected performance from its top competitor will ease the firm's path to making up ground in the American market -- and likely keep its stock's run going strong through the year, although the shares' 36% gains so far in 2013 may not be set for a repeat in the year's second half. Given that Abe's looked to deregulate the Japanese agricultural sector as well, Kubota's facing strength both at home and abroad.

Fellow Japanese manufacturer Komatsu's shares have slid more than 3% this past month, but like Kubota, this stock has blown up in 2013 and could be headed higher with a win by Abe and the LDP. However, there's risk in Komatsu's lofty 45% profit growth outlook in 2013: The company's the top manufacturer in China, but given the current slowdown plaguing the second-largest economy on Earth, Komatsu investors could be left disappointed. Komatsu's likely to see a strong uptick for the full year due to the weak yen -- particularly if Abe moves more aggressively after the elections -- but China's slump could make meeting optimistic projections a tall order.

Japan's been the best world market in 2013 behind the weak yen, and major stocks like Komatsu and Kubota have soared. But even as Japan flies high, other world markets have soured.

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The article Japan's Election Looms Large for the Nikkei's Future originally appeared on Fool.com.

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Originally published