The Nikkei Gains Behind Japan's Inflation Drive

Experts and economists recently have talked tough on Japan's rise from more than two decades of stagnation, but investors have had nothing but green to show for the year. Japan's Nikkei has jumped more than 38% for the year and added another 0.2% this past week to one of the world's best performing stock indices.

Signs of hope are showing up for Japan's goals of steady economic growth and inflation. Prime minister Shinzo Abe's ambitions have paid off for investors, but can they keep succeeding for a market that's stunned the world in 2013? Let's catch up on the latest from across the Pacific.

Inflation's welcome gains
Japanese inflation reached a five-year high this week as prices have jumped behind the country's massive stimulus initiative. Core consumer prices climbed 0.8% in August, a slight rise from July's 0.7% mark, and the third consecutive month of rising prices. It's not yet the 2% inflation Abe's aimed to achieve, but it's meaningful progress for a country that's weathered far too many years of deflation.


Economists have poured cold water on the figure's rise. While inflation may be at a multi-year high, some experts claim the numbers are at a peak for now. Inflation's low-hanging fruit of fuel prices and other essentials have jumped, but economists have pointed out that many consumer goods, and other elastic economic products, haven't seen the same sort of considerable gain.

Fresh food prices, known for their volatility, aren't incorporated into Japan's core consumer price index, and thus, their fluctuations haven't affected the overall inflation gains. Additionally, durable leisure good prices climbed only 0.1% in August. That's better than years of falling prices, but it's nowhere near what regulators are looking for. It'll take time for wages, which haven't seen much of a gain in Japan lately, to catch up with rising prices and allow Japanese consumers to push the economy higher.

Japan's planned sales tax increase, designed to help offset mounting public debt, could crimp those plans and the rapid gains in some industries. However, regulators are looking out for some businesses: Tokyo's considering slashing auto taxes to help leading Japanese carmakers such as Toyota avoid higher costs. Japanese automakers already face steep domestic taxes, and the sales tax increase would make sales at home an even pricier proposition.

Toyota's Japanese sales have risen, thanks, in part, to government aid for the industry; but it -- and other Japanese automakers reliant on sales at home -- could see up to a 20% fall in domestic vehicle sales in the next quarter as that aid expires. International sales will become much more important to both Toyota's business and investors, particularly as the company's slumped in China as compared to European and American competitors.

Toyota's stock has soared nearly 40% year to date, but some businesses around the country have rewarded investors even more handily in 2013. Panasonic's stock has exploded to the tune of 59% gains year to date, but don't count on this business's success so quickly: Panasonic is dealing with a decline in the electronics sector, as tech giants such as Samsung crowd out competition. Still, credit Panasonic for doing what it can to revitalize a business that has lost more than $7 billion in each of the last two years: The company's selling 80% of its health-care business to KKR for $1.67 billion in a deal announced this week.

For KKR, the deal is a move to give the company a route into Japan's gains. Panasonic's health-care business produces devices and supplies such as glucose monitors for diabetics. That's a market poised to grow with the rise of diabetes worldwide, and one that could jump in Japan for KKR, considering the country's aging population. For Panasonic and its investors, it's one more retooling of a company desperately in need of turning around its finances.

The jump this year in Panasonic's stock is a cautionary tale for most investors: Not every soaring stock in Japan is worth its gains.

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Differentiating Japan's great businesses from its laggards like Panasonic can be a tough proposition just by looking at stock charts. If you're looking to capitalize on Japan's run, it doesn't have to be so difficult for your portfolio: Profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report, "3 American Companies Set to Dominate the World," shows you how. Click here to get your free copy before it's gone.

The article The Nikkei Gains Behind Japan's Inflation Drive originally appeared on Fool.com.

Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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