Japanese stocks remain a buy

Japan’s Nikkei stock index leapt by 57% last year, but so far this year it has been one of the developed world’s worst performers. It lost around 10% in the first quarter.

Foreign investors, who account for most of the market’s trading volume, have been unnerved both by events abroad and by this week’s increase in Japan’s consumption tax.

This tax, equivalent to VAT, was last raised in 1997. It is now going up from 5% to 8%. The idea is to raise an extra 1% of GDP in taxes, and start making a dent in Japan’s annual overspend – important given the country’s overall public debt pile of 240% of GDP.

But the fear is that this could choke off Japan’s recovery and cause another recession, as the last hike is thought to have done in 1997.

Yet “a rerun of 1997 does not seem terribly likely”, as the FT’s Lex pointed out. Back then the real culprit was corporate confidence, not consumers’ mood. It was only as companies collapsed, exposing “wobbly banks”, that consumers pulled back.

The Asian crisis of 1997 hardly helped. Today, banks are fixed and firms have paid off their debts. Indeed, half the companies in the wider market hold net cash.

Also, back in 1997 unemployment was rising, hardly good for consumer spending, whereas today it is at a fresh low of 3.6%. Meanwhile, the ratio of jobs to applicants has hit a new high of 1.05, which should lead to wage rises as companies compete for scarce staff.

Nikkei 225 price chartAll told, the sales tax hike may well trigger a drop in demand across the economy. Japan’s GDP may even shrink in the second quarter. But growth is expected to rebound in the third quarter.

Investors are also awaiting reforms to raise the economy’s long-term growth rate. These include liberalising the labour market and deregulating cosseted sectors, such as health care and agriculture. These reforms should be announced by the summer.

In the meantime, it’s good news that the ‘special economic zones’ which will spearhead the reforms cover an area of Japan worth 40% of GDP, says Aaron Back in The Wall Street Journal.

That’s a good sign: around a decade ago, the last time such zones were put in place to showcase big changes, they were “tiny”. Throw in cheap valuations and the Bank of Japan’s willingness to print more money to prop up the stock market, and Japan remains a buy.

66% off newsstand price

12 issues (and much more) for just £12

That’s right. We’ll give you 12 issues of MoneyWeek magazine, complete access to our exclusive web articles, our latest wealth building reports and videos as well as our subscriber-only email… for just £12.

That’s just £1 per week for Britain’s best-selling financial magazine.

Click here to take advantage of our offer

Britain is leaving the European Union. Donald Trump is reducing America’s role in global markets. Both will have profound consequences for you as an investor.

MoneyWeek analyses the critical issues facing British investors on a weekly basis. And, unlike other publications, we provide you with the solutions to help you turn a situation to your financial advantage.

Take up our offer today, and we’ll send you three of our most important investment reports:

All three of these reports are yours when you take up our 12 issues for £12 offer today.

MoneyWeek has been advising private British investors on what to do with their money since 2000. Our calls over that period have enabled our readers to both make and save a great deal of money – hence our position as the UK’s most-trusted investment publication.

Click here to subscribe for just £12