Sony Corporation (ADR) (SNE), Komatsu Ltd (ADR) (KMTUY): Is Japan’s Surging Stock Market Hiding a Dangerous Risk?

Japan’s been the growth story of the year. The country’s new stimulus measures have turned around two decades of stagnancy, and fueled the NIKKEI 225 (INDEXNIKKEI:NI225) stock index to gains of more than 31% year to date. The NIKKEI 225 (INDEXNIKKEI:NI225) picked up another 4% this week as investors have rejoiced about the direction of Japan’s markets. But can this surging growth story keep it up? Let’s check out the latest from across the Pacific.

Dangers in the rise
Japan’s GDP has picked up sharply this year, but the country has cautioned that the strong gains that investors have come to expect might not pan out for the next few years. Tokyo’s forecast estimates that Japan’s economy will pick up by just 1% in the 2014/2015 fiscal year, far below the 2.8% growth the government expects from the current year.

The IMF’s gotten in on the act, as well, with a new round of warnings to economists and investors. The agency has cautioned that Japan’s stimulus-fueled recovery could inflict severe damage to the global economic bounce back from the 2008 recession should prime minister Shinzo Abe’s measures fail. Like with China’s slowdown that has dominated headlines, an economic slump would hit Japanese firms, which are relying on strong growth, hard.

More importantly, if the yen fails to keep up its weakening against major currencies, particularly the dollar, Japan’s top exporters will face trouble. Firms like construction and manufacturing giant Komatsu Ltd (ADR) (OTCMKTS:KMTUY) are counting on the weak yen to boost its bottom lines from overseas sales. Komatsu Ltd (ADR) (OTCMKTS:KMTUY) rules the Chinese manufacturing market’s top spot, and although the Chinese market’s slowdown has hurt Komatsu Ltd (ADR) (OTCMKTS:KMTUY)’s outlook, a weak yen still makes the company’s forecast look optimistic. A failure on that end would be a big blow to both the company and investors looking to take advantage of Japan’s surge.

For now, however, the Japanese economy’s boost is lifting the results from the country’s top companies. Sony Corporation (ADR) (NYSE:SNE) reported earnings this week, and the firm finally brought its electronics division’s bottom line back to profitability in the most recent quarter. Sony Corporation (ADR) (NYSE:SNE)’s stock shot up sharply on the news that its electronics division, including sales from smartphones, televisions, and other products, did well. Sony Corporation (ADR) (NYSE:SNE)’s counting on those sales to help push into a growing future that capitalizes on the mobile revolution and other technological pushes. What happens to Sony Corporation (ADR) (NYSE:SNE)’s entertainment division now becomes the big news for investors: Many analysts have pushed for the firm to spin off the branch to unlock shareholder value, although others think the possibility is still remote.