Thanks to massive amounts of American financial assistance in the post-World War II era, Japan became a leading manufacturing and export hub, serving as the workshop of the world before China held that particular honor. If you purchased a stereo, calculator or any other sort of electronic device in the 1970s or 1980s, it probably was stamped “Made in Japan.”

Since then, the face of international trade has radically changed. China has become not only one of the largest manufacturing centers in the world, but also one of the largest consumers. In an average month, China imports about USD1.5 billion worth of goods and since 2010 it has been the largest consumer of Japanese exports.
However, in the first quarter of this year, Americans once again became the largest consumer of Japanese goods, surpassing China for the first time in more than two years.

Regional tensions have certainly played a role in that shift.

An ascendant China has driven remilitarization in Japan over the past few years, as has rising tensions in North Korea.

Japan imports more than 80 of its energy supply as well as the majority of its raw materials. Historically, the country has been dependent on the US Navy to secure its sea lanes. However, the Land of the Rising Sun has been investing heavily in upgrading and expanding its coast guard.

The Chinese have launched their first aircraft carrier and have been working to develop its submarine fleet, motivating Japan to beef up its own defenses.
China’s growing regional influence coupled with an increasingly aggressive, at least rhetorically, North Korea has left Japan feeling exposed despite its long-standing mutual defense agreement with the US.

As the balance of regional power evolves over the coming years, power politics will influence trade flows across Asia. Thanks to that transition, the US will become an even more important trading partner for most Asian countries, particularly as the Europeans continue to muddle through their recession.

With all of those dynamics at play Japanese exports to the US shot up by 10 percent in the first quarter, reaching JPY11.4 trillion, while exports to China fell by 9 percent to JPY11.3 trillion.

The simmering tension over the Senkaku/Diayou Islands has sparked a wave of nationalistic sentiment, prompting Chinese consumers to boycott Japanese goods and Japanese consumers to eschew Chinese products. As a result, both countries will be looking to the US market to pick up some of the slack that has created.

At the same time, the rapid devaluation of the yen is also making Japanese exports increasingly attractive to US consumers, particularly as the Chinese continue to gradually step back their currency controls on the yuan. While the value of the yuan is still more a reflection of government policy intentions than a true market value, the Chinese have been gradually widening the range in which the value of the currency is allowed to float, as it works towards a more meaningful currency reform.

While Japanese products will never supplant Chinese goods on American shelves—we import roughly three times more from China in terms of dollar value—we’re importing more while selling them less.

Those shifting trade dynamics are sure to create more Asian tension and will likely cause China to rethink its tentative steps towards liberalizing the yuan. But these shifts also clearly underscore the growing influence of countries such as China, though many may still consider them emerging markets, on the world stage. It also sets up a potential conflicted between developed and emerging Asia, especially if Japan’s aggressive stimulus program pulls the country out of recession.

Portfolio Updates

Keppel Corp (OTC: KPELY), the largest builder of offshore oil rigs in the world by output, reported that its first quarter net profit fell sharply year-over-year to SGD331million, while revenue was down 35 percent to SGD2.8 billion. Earnings per share fell to SGD0.184.

While net profits at the offshore and marine division were down by 12 percent in the first quarter, the real culprit behind the drop is the tough comparable period. In 1Q 2012 Keppel Corp realized a large chunk of revenue, thanks to the sale of homes at its Reflections at Keppel Bay property. If the impact of that one-time item is backed out, earnings this quarter would be in line with last year.

Keppel Corp is well positioned for earnings growth in 2013. So far this year, it has won SGD1.66 billion in new orders and its order book stands at SGD13.1 billion, with deliveries extending into 2019. Five new rigs were delivered in the first quarter and seven KFELS B Class jack up rigs have been ordered year-to-date, for a total of 21 on order.

The fact that most new oil exploration and production work is being done in deepwater, a trend that is likely to continue as long as crude prices remain about USD100, is benefiting Keppel because it typically builds about half of all jack up rigs globally.

The first phase of the company’s 1,300 megawatt power generation facility came online in the first quarter and it should be fully operational midyear. This facility, combined with the completion of projects in Qatar, will create an additional steady revenue stream for Keppel Corp.

Despite its strong performance in 2012, Keppel’s property division will likely be a drag on performance this year. It currently has 1,000 new residential units ready for sale in Singapore and it recently partnered with a leading Chinese property developer on projects on the mainland. However, cooling measures taken by the government there will likely slow property sales. Keppel Corp is a buy under USD20.

Taiwan Semiconductor (NYSE: TSM) reported better than expected results, as first quarter net profit rose by 18 percent to TWD39.6 billion compared to the year-ago period. Revenue was up 26 percent to TWD132.8 billion, largely thanks to growing demand for high-performance chips for smartphones and tablet computers.
The company said that it would stick with its plan to spend TWD9 billion this year on expanding its production capacity, to meet growing chip demand. Taiwan Semiconductor remains a buy under 20.