How to Profit From Japan's Shrinking Economy

Japan's economy shrank more than expected during the last quarter of 2011, as a strong yen and floods in Thailand hampered Japanese efforts to recover from last year's earthquake and tsunami. The Japanese economy shrank an annualized 2.3% during the 4th quarter, which was a much bigger drop than most economists predicted. Japan has faced a number of obstacles to economic growth since disaster struck last year in the form of an earthquake that triggered a devastating tsunami. The Japanese economy has grown even more dependent on energy imports because some of the country's nuclear power plants were taken offline over safety concerns raised by the badly damaged Fukushima Daiichi nuclear power plant. Much of the Japan's refining capacity was also disrupted by the disaster, which slowed the efforts of manufacturers like Toyota Motor Corporation

, Sony

and Honda

to recover from the disaster. Japan's export driven economy was also hurt last year by an increasingly strong yen, as traders wary of the Eurozone financial crisis moved money into safe haven currencies like the Japanese yen and the Swiss franc. Despite Japanese efforts to cool the rising yen, Japan's currency remains at levels that make it extremely difficult for Japanese exporters to make a profit. Unusually severe flooding in Thailand also played a large part in the Japanese economy's dismal 4th quarter performance. Many Japanese exporters have manufacturing facilities in Thailand, which were shut down by flooding that reached the streets of Bangkok. The financial crisis facing Eurozone economies like Greece, Italy and Spain was another factor in Japan's worse than expected 4th quarter economic contraction. Besides its effect on the Japanese yen, the financial crisis has led to less demand for Japanese products from struggling European economies. Japanese officials and most economists commenting on the issue say that the worst is over and that Japan will soon return to economic growth. There are a number of factors that support this opinion. Earthquake and tsunami reconstruction projects in Japan and the fading effects of the Thai floods should give the Japanese economy a much needed boost in the 1st quarter of 2012. If Greece is able to avoid default and the American economy improves, Japanese exporters will see rising demand and the yen could fall back to levels that will make it easier for Japanese exporters to sell their products in international markets for a profit. The Japanese government has also said that it might intervene in the foreign exchange markets if the Japanese yen doesn't fall. Japan's Finance Ministry confirmed last week that it had conducted stealth interventions last year and that it might do so again if the yen remains at levels that aren't conducive to a growing Japanese economy. Japan's stock market took today's economic figures in stride. The NIKKEI 225 index of Japanese stocks rose 0.58% to end the Monday trading session at 8,999.18. While the worse than expected 4th quarter economic performance may be disturbing, Japan's economy should be back on the path to growth in the 4th quarter.