Japan and China: Time to Celebrate?

09/17/2013 10:00 am EST

Focus: GLOBAL

Stephen Leeb

Founder and Research Chairman, Leeb Group

The Japanese have been celebrating after winning their bid to host the 2020 Summer Olympics; from our perch, the party is just getting started in Japanese stocks, too. And less heralded, but no less exciting, has been the recent showing by neighboring China, observes Stephen Leeb of The Complete Investor.

The Olympics aren't the only reason for Japan to cheer: So-called Abenomics, named after Prime Minister Shinzo Abe, continues to pay off.

Japan's combination of aggressive monetary easing, fiscal stimulus, and economic reform has translated into faster economic growth after decades of stagnation and many false starts.

The country just revised its second-quarter inflation-adjusted real GDP growth upwards to 0.9%, which equates to an annualized 3.8% rate.

Japan also revised its first-quarter GDP upwards, to 4.1% annualized, up from the previous 3.8%.

Japan is still struggling to boost inflation, but is headed in the right direction. Although the country's GDP deflator was a negative 0.5% year-over-year, after 12 consecutive months of deflation, Japan recorded back-to-back June and July increases in its monthly consumer price index.

With its money supply growing at its fastest pace in 14 years and its currency near a four-year low, Japan's inflation rate should continue to rise, breaking the grip deflation has held on the country for more than two decades.

Despite the 30% plus gains they've enjoyed this year, the stocks that comprise the iShares MSCI Japan ETF (EWJ) still trade at 14 times depressed earnings.

Meanwhile, China's GDP growth fell to just 7.5%, but based on recent data, China looks unlikely to decelerate further. Indeed, it now appears that growth in China could again tick up to 8% by year's end.

Unlike the leaders in Japan, China's chiefs are eager to keep a lid on inflation. They set a full-year target of 3.5% growth in the nation's consumer price index (CPI) and are meeting that goal.

The country's CPI last month edged down to 2.6%, and essentially all of that increase came from rising food costs, which represent more than a third of China's price basket. Producer prices, meanwhile, which typically lead consumer-level prices, measure growth of a tame 1.6%.

While many emerging economies are struggling these days, China continues to run a current account surplus. It also has the benefit of a strong currency.

The yuan trades close to a record high against the dollar. The strong currency will help to keep Chinese prices in check if, as expected, materials prices continue to climb.

Healthy economic data, coupled with low inflation, make Chinese stocks attractive as well. Our first choice here is the China Fund (CHN). It holds a diverse portfolio of stocks primarily focused on the Chinese domestic market.

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