NEW YORK (TheStreet) -- As the week comes to a close, I thought it would be important to highlight the state of Japanese economic affairs. China and Europe caught most of the headlines this week, but we are stuck asking the same questions about Japan going into the second half of 2013. Investors are looking to see whether Japan can correct its high debt-to-GDP ratio in the face of increased government spending to spur growth.
Similarly, policymakers have been debating the efficacy of a tax increase. Bondholders see it as a way to keep fiscal matters in check, yet monetarists are concerned it could kill off any form of recovery currently taking place. Alongside all of these factors, global financial markets also sway the direction of Japanese assets. The first chart below is of iShares MSCI Japan Index (EWJ) over Vanguard Total World Stock Index ETF (VT). This pair measures the relative strength of Japanese equities vs. a broader world index. Japan equities began underperforming in late July, which coincided with a yen spike higher. Policymakers are attempting to stimulate investment and drive equity markets higher, but they cannot escape the sentiment of the global market place. Worry surrounding the length of U.S. monetary stimulus remains unknown, and mixed data continue to add to the uncertainty. Due to the heavy correlation of risk assets globally, there will need to be an improvement in the attitude of both Japanese and foreign investors before money begins pouring back into the Japanese equity index.
The next chart is of CurrencyShares Japanese Yen Trust (FXY) over CurrencyShares Swiss Franc Trust (FXF). This currency cross has been relatively weak for most of 2013, but recently it has traded in a wide downward channel with large price swings back and forth. The pair sold off broadly as the Bank of Japan decided to embark on unprecedented stimulus measures at the beginning of the year to boost growth. The strong downtrend accompanied by low volatility is largely over, and now markets oscillate back and forth off of wide support and resistance levels. The currency cross currently looks to be bouncing lower off a resistance line, which is a bullish signal for riskier global assets. If the pair can push towards the low of its range, then markets should gain enough bidders to trend higher over the next few weeks. At the time of publication, Sachais had no positions in stocks mentioned.Follow @AndrewSachais This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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