Can Japan’s run of good news continue? Yes – here’s why

Japan was one of the fastest-growing developed economies in the world in the first three months of the year.

Now there’s a sentence you don’t get to write very often.

And the even better news is that growth came in ahead of everyone’s expectations. It suggests that the grand plan to reflate the Japanese economy is working.

But can the good news continue?

We very much think so. Here’s why…

Abenomics is about more than just a policy change

‘Abenomics’ – the policy of reflation pursued by Japanese prime minister Shinzo Abe – seems to be working.

There’s still plenty of nay-saying out there about Japan. That’s only to be expected – this is a market coming out of more than two decades in the wilderness. But it’s also extremely encouraging. As I’ve said before, the more scepticism there is, the more potential converts there are to a more bullish state of mind.

In the first quarter of the year, the Japanese economy grew by 0.9%, or 3.5% annualised. That was well above the 0.7% quarterly gain expected. Exports grew by 3.8% in the quarter, while consumer spending rose by 0.9%.

The shift in consumer spending is particularly striking. As Masaaki Kanno at JP Morgan pointed out to the FT, consumer spending is usually last to recover. “In the past, recovery was driven by an increase in exports, which led to a rise in cap ex [investment by companies], and eventually consumption followed with a time lag.”

This suggests that if nothing else, Japanese consumers either believe that inflation is coming, so they should spend now, or they are convinced by the booming stock market that the good times are back.

They might also – just possibly – be anticipating better times in the job market. As Peter Warburton of Halkin Services points out, since April, companies have been awarded tax breaks to the value of 10% of the value of pay increases of 5% or more. “Abe’s strategy is to transfer the profits windfall obtained through yen depreciation to the wage bill.”

The shift in psychology is an important part of Abenomics, says Warburton. This is more than just a change of government or policy. “This is about the reassertion of Japan’s place in the world.” But can it continue?

The answer is yes. And one of the main reasons is because Japan has a very powerful ally behind it – the US. America has implicitly backed Japan’s reflation policy, even although a weakening yen is not necessarily good news for US exporters. There are a couple of very sensible reasons for this.

One, which we’ve touched on in the past, is the fact that the US needs a strong Japan to act as an ally and counterweight to China in the region. A potentially far-reaching trade deal – the Trans-Pacific Partnership, which strengthens trading ties between the US and Japan, Australia and Vietnam among several others – is just one aspect of this.

But a second factor is that if the Federal Reserve ever wants to ease up on the business of money printing, it’s helpful to have someone else in the world providing an unlimited supply of liquidity to pump up stock markets.

American backing isn’t the only reason why Abenomics looks set to succeed. But it’s certainly a great help.

How to invest in Japan

Markets of course, have gone wild recently. A correction could come at any moment. At the same time, you could have said much the same at any time since the Nikkei passed 13,000.

I’m not saying you should lob caution to the winds, but I don’t think long-term investors will regret buying into Japan now. As I said the last time, if you’re worried about getting your timing wrong, then you can avoid the pain of cognitive dissonance by simply drip-feeding money in on a regular basis.

We’ve mentioned several Japan funds in MoneyWeek magazine in the past. But in the latest issue, my colleague, exchange-traded fund (ETF) specialist Paul Amery, looks at ETFs that reflect the performance of both the wider index, and the smaller companies sector.

Paul also looks at some ETFs that hedge your yen exposure. One thing to bear in mind about this is that if you do choose to hedge the yen, you are making a more concentrated bet that Japan’s rise will continue. Buying Japan in sterling offers something of a safety valve – if stocks fall, the currency is likely to rise, offsetting your losses to an extent. 

We look at some of the wider implications of Japan’s devaluation – including why it may be bad news for China – in this week’s issue of MoneyWeek magazine. If you’re not already a subscriber, subscribe to MoneyWeek magazine.

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  • Hugh

    Japan’s stock market looks more like the early stages of a ‘crack-up boom’ than a healthy recovery. Time will tell if financial alchemy really exists!

  • Kendo Nagasaki

    I sold all of my Japan holdings this week for an aggregate 40% profit:
    Baillie Gifford Japan trust and Shin Nippon. Also JP Morgan IT, Neptune Japan Opportunities and GLG Japan Core Alpha. (Yes, I was a little over enthusiastic as prices rose).
    I suspect that prices may now level off or dip before moving up again.

  • IJ

    First of all, congratulations on the call John. I must confess I was among the sceptics and am now ruing a missed opportunity. But there is something I want to quiz you on. You seem to contradict yourself on this reflationary policy business. When Japan does it, it’s all great and the good times will roll. Yet over the years you have heaped criticism on Bernanke, who is after all the Jedi Master to Kuroda’s Skywalker, and owns the patents. So either Bernanke has been right all along and reflationary policies work (I must say they seem to be in the US too), or they don’t work in which case we should be very worried about Japan given a) its far inferior macro and b) far more aggressive monetary policy (QE on steroids blah blah). So which is it?

  • jrj90620

    I don’t understand,why it is a good thing for an economy to have a couple % extra growth and everyone’s savings decline by 30%.Is it just me,or am I missing something?The Yen has had a massive decline against the U.S. Dollar,while the Dollar has been declining against goods.Don’t believe,what the U.S. govt tells you about inflation.I live in the center of So California and can tell you there is no deflation or even 2% inflation.So,the Yen,declining against the Dollar, has declined,even more, against real assets.Like the other commenter said.Why is it a good thing,when Japan’s central bank steals from Yen holders and not a good thing,when Bernanke does it?Both are just distributing wealth,from some and giving to others and calling it stimulation.Govt,with it’s inefficiency,waste,fraud,etc,always takes more out of the economy,than it puts in.

  • Hugh

    “Everything that the state says is lie and everything it has it has stolen” – Friedrich Nietzsche

  • Boris MacDonut

    Yes Japan. It has a debt to GDP of 230% and has lived with it for 25 years or more. Jolly well done.

  • Mike Jamieson

    Consumer spending in Japan is up and thats about all unless you want talk about the bond yields but BOJ is keeping them lower by buying like crazy. All the smart money is sending it out of Japan. Who would buy devalued Japanese investments anyway? Wages are still not rising and inflation is just beginning to show itself. Then to cap it all, all the companies and businesses in Japan are flatly refusing to spend. Now is the tine to take profits and invest elsewhere before it pops!

  • kp

    i keep hearing from MW that ETF are the way to go as they are cheap but you still pay dealing fees, stamp duty or am i missing something

    where is the best places to invest inan etf

  • Orb

    I too agree with 3 & 4: Why do the MW posse hail the supercharged QE going on in Japan as the ‘the holy Japanomics Grail’, yet forecast no end of ‘it will end badly’ for the UK or US QE?

    And anybody able to explain how Abenomics will solve the National Debt issue? Or what will happen to interest payments on that debt (as a portion of the National Budget) if this unprecedented QE (even by UK standards!) encourages rates to rise even a ½%?

    There are some who regard Japan as ‘a bug in search of a windshield’; having looked at some of the maths, I concur.

  • Orb

    To further enhance my argument, some excerpts from a recent piece by MW’s TT:

    “…a 10th straight month of deficits as the rise in the cost of imports far outweighed the benefit of the weaker JPY…”

    “…alarming rising in corporate bond yields. Government bond yields are rising too…”

    There is more I could quote, but the point is I see only red flags. I would urge caution to all potential investors in Japan; the current environment is better suited to traders IMHO.

  • fandango

    Well, this has turned out nicely as of 23/5/13…

  • Changing Man

    The run of good news did not continue! Once again the “Curse of Money Week” strikes with the Nikkei crashing 7% today!

  • Orb

    ‘nuf sed!!

  • Boris MacDonut

    The QE seems to be working. Nikkei up 40% since the new year. Go to the Cotswolds, Bath, Chester etc….the Japanese tourist is back.