Edward Conard

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AI Summary. Japan offers investors geographic diversification, with among the lowest correlation in economic conditions to the US of any developed country, reflecting trade exposure split between the US, China, and the broader Asia region. Most sales of Japanese-listed companies are domestic, and investors remain underweight Japanese assets.

Karen Karniol-Tambour and Alexa Rozario Bridgewater Associates
Date Posted:

Bridgewater argues that Japan, India, and Brazil offer the largest opportunities for investors seeking geographic diversification as conditions in the EU and UK are closely linked to the US.

Does Japan offer investors meaningful geographic diversification from the US?

Core argument: Japan exports roughly equal amounts each year to the US and China and the most to the broader Asia region, giving it among the lowest correlations in economic conditions to the US of any developed country.

Japan stands out as one of the most diversifying places for investors and one of the few places in the world that can absorb sizable amounts of capital. It is a trade-heavy economy that sits at the crossroads of the East and West, exports almost equal amounts each year to both the US and China, and exports the most to the broader Asia region. This diversified exposure to global trade means it has among the lowest correlations in economic conditions to the US of any developed country. Not only are Japanese conditions lowly correlated to the US, but Japanese equities also provide a relatively high level of exposure to those domestic (versus global) conditions. While Japanese growth is driven by a diverse set of trade linkages, the majority of the sales for companies listed on Japanese exchanges are domestic. After decades of Japan basically not having a monetary policy cycle and relatively stagnant conditions, investors remain underweight Japanese assets.

Takeaways by Macro Roundup® AI

  1. Japan exports roughly equal amounts each year to the US and China and the most to the broader Asia region, giving it among the lowest correlations in economic conditions to the US of any developed country.
  2. The majority of sales for companies listed on Japanese exchanges are domestic, so Japanese equities provide relatively high exposure to Japan's domestic conditions rather than global conditions.
  3. Investors remain underweight Japanese assets after decades in which Japan essentially lacked a monetary policy cycle and had relatively stagnant conditions, while Japan is one of the few places able to absorb sizable amounts of capital.

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