HARAKIRI
by Yiannis G. Mostrous
Editor, Growth Engines
September 14, 2007

Japanese Prime Minister Shinzo Abe finally resigned, apparently unable to withstand the pressure from the anti-reform factions of his party. It looks like he walked into the trap after promoting a lot of anti-reform party members to key positions in the cabinet in the last government reshuffling.

For people like me who've been watching Japan try to come out of its frustrating economic past, this is certainly a setback. Abe proved that he was no Koizumi, as he was unable to pass a lot of Japan's reform initiatives.

It's clear that a total reversal of the economic reform process is now a possibility that, if materialized, will have dire consequences for the future of the Japanese economy. Once the political establishment goes back to its old ways, any attempt for real and sustainable economic growth will be doomed.

Unless the Liberal Democratic Party (LDP) is able to elect a pro-reform leader--something that seems unlikely at the moment--expect the business environment to also deteriorate with reforms labeled a failure as a whole. The result of all these will be deterioration in future earnings growth and an even weaker stock market.

This becomes more crucial as the uncertainty in global financial markets continues, and elections are approaching fast in Japan. This isn't the right time for implementing change. 

But there's no reason to sell Japanese stocks that you own yet, solely based on the political developments in the country. Instead, a wait-and-see approach should be preferred because Japan can remain, at the very least, a great proxy market for global economic growth given its export-oriented economy.

Koizumi tried to change this export orientation in an effort to help domestic demand grow, giving the economy greater balance and a better chance to withstand global economic downturns in the future. This process has now been stopped.

At the same time that all this is happening in Japan, the global markets are looking for direction. For the time being, the upside seems to be winning. But more bad news on the credit front can change the mood.

However, the markets have a good chance to finish the year strong. But I expect some weakness sometime between now and the end of October.

Asian markets in particular should benefit from a scenario in which the US economy avoids recession, but the dollar remains relatively weak. During down times in the US, Asian markets will suffer given their size and perceived risk. But that dynamic is changing; Asia no longer gets pneumonia when the US catches a cold.

Short term, things may get volatile. But long term, Asian economies are better positioned than ever to withstand adversity. Asia market perma-bears will have to wait a long time for an economic meltdown in the region. After all, the majority of the Asian economies have current account surpluses, while debts have been substantially reduced, and deficits are also contained.

At this juncture, and in an Asian context, look for companies in the telecommunications, utilities, banking and real estate sectors to add to your portfolios.

© 2007 Yiannis G. Mostrous
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