How Relevant is Japan?

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American markets sank on Monday as recent reports from Japan suggested that the country’s economy is slowing down. The nation’s gross domestic product (GDP) rose at an annualized pace of just 1.4% in the three-month period ending in June, compared to an estimate of 2.5% by economists.

This sluggish figure implies that the country’s post-quake recovery is increasingly fragile and could face some serious trouble heading into the final part of the calendar year. It also doesn’t help that some of Japan’s key export markets, such as America and China, are seeing lackluster outlooks as well, meaning that Japan could find it more difficult to grow in the future (See Developed Asia Pacific ETF Investing 101).

Yet, I have to admit I was somewhat surprised at the sharp reaction by American markets to the Japanese slowdown, as the nation is often overshadowed by its emerging peers in Asia and the rest of the BRIC bloc. This trend makes me wonder, how relevant is Japan in this day and age?

Yes, the country remains a global economic force and is currently the third biggest economy (although it slips to fourth on PPP terms behind India) in the world and a major exporter; but it seems as if the country’s best days are behind it.

After all, Japan has yet to recover from its property bust and is now starting the third decade of its ‘lost decade’ with no end in sight. This is especially true given the lack of population growth in the country, one of the highest debt/GDP ratios in the world, and pretty much nothing in terms of home grown commodities, leaving the nation susceptible to foreign supply shocks (read For Japan ETFs, Think Small Caps).

What do you think? Is Japan still an economic force to be reckoned with?

Can the country come back to its former glory or is it doomed by demographics to face a slow and inevitable decline as its mainland rivals supplant it on the world stage?

Eric Dutram is the ETF Strategist for Zacks Investment Research.