Advertisement

Japan’s surprise recession

Japanese stocks remain a good bet despite the unexpected contraction in the country's growth.

Most economists expected Japan's economy to bounce back from its dip in the second quarter. Not for the first time, they got it wrong. GDP shrank by an annualised 1.6% between June and September. That means Japan has fallen into recession defined as two successive quarters of falling output for the fourth time since 2008.

Advertisement - Article continues below

The government increased the sales tax the equivalent of VAT in April. Consumers brought forward spending, so GDP rose strongly in the first quarter, then slumped in the second. By the third quarter, the squeeze on spending was supposed to have been shrugged off.

But the tax hike appears to have done more damage to underlying momentum than expected. This is a hefty blow to Abenomics Prime Minister Shinzo Abe's attempt to end almost two decades of stagnation with a mix of structural reform, a massive monetary easing programme, and fiscal stimulus.

The sales tax increase was part of these plans, being an attempt to start getting the country's huge public debt under control. Abe has now decided to postpone a second planned increase and will stage a snap general election in December, looking for a renewed public mandate for his policies. Voters are expected to return his party to power.

717-nikkei

Abe must push on with structural reforms to boost long-term growth potential. But the quantitative easing (QE) programme shows signs of working and there seems to have been "a tentative lifting of Japan's deflationary mind-set". Earnings are picking up slightly, along with consumption, so the long period of deflation could finally end.

The economic outlook is murky, but stocks should still do well. The Bank of Japan has made it clear it will print more money if that's needed to reach inflation of 2%. That implies further yen weakness, which boosts the export-orientated market heavyweights.

One estimate suggests that every 1% fall in the yen against the dollar raises large company profits by 0.5%. Throw in still reasonable valuations and reforms to the government pension fund that will raise demand for equities, and Japanese stocks remain a good bet.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
There are lots of reasons to be bearish – but you should stick with the bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
What gold, bonds and tech stocks have in common
Stockmarkets

What gold, bonds and tech stocks have in common

"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy c…
10 Jul 2020

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Three ideas for Lloyds Bank's new boss
UK stockmarkets

Three ideas for Lloyds Bank's new boss

The Black Horse needs whipping into shape. A change at the top provides a great opportunity, says Matthew Lynn.
12 Jul 2020
Why the moving average is my favourite charting tool
Sponsored

Why the moving average is my favourite charting tool

Traders and technical analysts use "moving averages" to iron out daily fluctuations and give a much clearer picture of a market's direction. Dominic …
13 Jul 2020