Ignore Japan’s economic data shocker – it’s still a buy

published 13 August 2014

Wow. Japan had a stinker of a second quarter.

Economic activity plunged GDP dropped by 1.7%. That's the worst fall seen since the days of the financial crisis in 2009.

As someone who's been bullish on Japan for longer than is probably wise, I've a fair old chunk of my pension invested in the country.

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So this must be worrying news, right?

Nope. Frankly, I couldn't care less.

Why GDP is such a useless figure for investors

But from an investor's point of view, GDP may be one of the most useless bits of data around.

For a start, markets are about what's happening now and what's going to happen in the future. By market standards, GDP data is ancient history.

The second quarter ran from April to June. It's August now. If you didn't already have a rough idea of what the second quarter was like for the economy, then you haven't been paying attention.

So GDP is really only telling you what you already knew this particular quarter was great; that particular quarter was a duffer.

It's also continuously revised. For example, already in Britain, we're being told that the catastrophic slump of 2008/09 wasn't quite as bad as everyone said at the time.

So not only is the figure well out of date by the time we get it, it's also wrong. Sometimes dramatically so.

A figure that's both late and often hugely inaccurate you can see why I'm not keen to incorporate it into my investment decisions.

Japan's current quarter will be a lot better than the last one

A lot of the slide hinges on Japan's consumption tax VAT, to you and me. Japan raised its sales tax in April. So smart consumers bought loads of stuff including property in March, while the tax was still 5%, rather than 8%.

So not only was GDP artificially low in the second quarter, it was artificially high in the first (because of all that tax-dodging spending). So second quarter GDP looked even worse by comparison.

There were some other dud figures in there as well, though. Investment spending by companies was down. However, that figure had enjoyed one of its biggest jumps in the past two decades in the first quarter, so it's hard to argue that investment is collapsing.

And with dwindling spare capacity' another woolly economic term that just means the amount of unused bits of machinery and human beings lying around doing nothing, ready to be put to work "firms should continue to invest in machinery and equipment", says Capital Economics.

That's good news. If companies are investing, it means they're building more factories, hiring more workers, and feeling confident about the future.

Better yet, the consumer is still looking perky. Retail sales are rebounding more rapidly than they did the last time Japan raised its sales tax, back in 1997. Meanwhile, notes the FT, "summer bonus payments a big part of salaried workers' pay are up by the biggest margin since 1990".

This is key. Japan is starting to see consumer price inflation returning. That's what happens when the value of your currency slides, and thus drives up the price of your imports.

But price inflation in itself isn't much use if it isn't matched by rising wages. If prices go up but wages don't keep pace, you've effectively just taxed your consumers. They aren't going to spend more if that's the case.

However, with companies hiring more, and fewer workers to go around, wages are going to have to rise.

That's good news for corporate profits, and it should mean more money going on investing as well.

Finally, there's the small fact that the Bank of Japan remains one of the central banks that is still firmly stuck in looser' monetary policy mode. The US and the UK are both under increasing pressure to tighten.

Given that looser monetary policy and rising markets tend to go hand in hand (judging by recent history), it suggests that Japanese stocks can rely on official' support if things start to look really grim on the economic front.

In short, I'm more than happy to stick with my investments in Japan. If you need some ideas on ways to play the market, check out this MoneyWeek magazine story from earlier this year. (If you're not already a MoneyWeek subscriber, get your first four copies free here.)

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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.