Japan hits a speed bump

Japan's rampant stockmarket growth has slowed to a crawl this year.

"The excitement Japan's fresh start once aroused has long since ebbed," says the FT. The Nikkei took off like a rocket in 2012 when Abenomics', the government's attempt to end years of stagnation and deflation, was launched.But it has been treading water for much of this year.

Prime Minister Shinzo Abe decided to raise the consumption tax, the equivalent of VAT, in April in order to boost government revenue and help cut borrowing. The move restored some fiscal credibility: the budget deficit has declined to a five-year low of 6% of GDP.

But weak data in recent weeks fuelled fears that it has also snuffed out the economic recovery. There is now talk of postponing a further tax hike, which had been planned for next year.

However, it's too soon to write off the rebound. Industrial production has been sliding since February, but the economy should by now have adjusted to the slump in sales triggered by the tax increase,says Capital Economics.

Firms are reporting little spare capacity, which bodes well for higher capital expenditure. And retail sales have ticked up, suggesting that consumption is recovering. Japan should also benefit from falling oil prices, as petroleum products comprise a fifth of its imports.

Nonetheless, the Bank of Japan seems likely to increase the pace of its quantitative-easing programme, as inflation looks to be weakening again. Looser monetary policy bodes well for equities, and also implies further weakness in the yen.

715_Nikkei

What's more, some of Abe's biggest reforms are coming to fruition, addsPeter Thal Larsen on Breakingviews. One of the most investor-friendly is a shift in the holdings of the Government Pension Investment Fund towards riskier assets. It plans to raise its allocation of domestic stocks to about 25%, from 12% today. Labour market liberalisation is on the agenda, but will take time.

Meanwhile, Japanese firms are under pressure to raise dividend payouts, given their relatively strong balance sheets. And they are also still reasonably priced, with many trading below book value. All told, the latest setbacks for Abenomics "are a speed bump, and not the end of the road".

Recommended

Green finance is set to be the most powerful financial repression tool yet
Bonds

Green finance is set to be the most powerful financial repression tool yet

The government has launched its “green savings bond” that offers investors just 0.65%. But that pitiful return is in many ways the point of “green” fi…
22 Oct 2021
Andrew Hunt: why it's a great time to be a deep value investor
Value investing

Andrew Hunt: why it's a great time to be a deep value investor

Merryn talks to Andrew Hunt, author of Better Value Investing, about his adventures in the market's dark underbelly, looking for the hated and neglec…
22 Oct 2021
Equities are not a good inflation hedge
Economy

Equities are not a good inflation hedge

Institutional investors are definitely now worried about inflation. But they're not yet worried enough to flee to cash, says John Stepek
22 Oct 2021
Why fed-up workers are quitting their jobs
Economy

Why fed-up workers are quitting their jobs

Workers are leaving their jobs at an astonishing rate, especially in the US, leading to a shortage of workers. What will that mean for our economies? …
22 Oct 2021

Most Popular

How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021