An optimistic outlook for Japan

It has been a lousy year for the Japanese economy. But it’s clear that a rebound is on the cards.

927_MW_P07_Markets

Japan's economy is set to bounce back

It has been a lousy year for Japan. An "ugly contraction" in the third quarter saw the economy shrink at an annualised rate of 2.5%, the steepest slide in four years. Capital expenditure dropped by 2.8% in the same period, the sharpest decrease since the third quarter of 2009. The latest quarterly Tankan survey of large manufacturers has revealed that businesses think conditions could worsen in the next few months.

Nevertheless,"this $5trn economy has been underestimated before", as Pete Sweeney points out on Breakingviews. The data isn't as bad as it seems at first glance, and there are plenty of grounds for optimism. For starters, part of the decline is due to the strongest typhoon in 25 years as well as an earthquake.

Meanwhile, dig into the Tankan figures and it's clear a rebound is likely, says Freya Beamish of Pantheon Macroeconomics. Fixed investment growth by large companies has accelerated to a fresh peak of 13% year-over-year, so we can expect capital expenditure to bounce back in the fourth quarter. The "gradual, but persistent" quickening in wage growth over the past two years isalso worth highlighting. Hourly wages are climbing by 2.6% year-on-year, notes Jonathan Allum of The Blah. Pay growth should fuel consumption, which accounts for around 60% of GDP.

Japanese companies are spending more on automation and robotics in order to cope with the shortage of employees in the tightest job market in decades. The unemployment rate is 2.4%, close to a 25-year low.

Labour-market reforms have brought more women into the workforce and the government has relaxed its attitude to foreign workers by granting short-term visas for the tightest sectors, including healthcare and tourism. These changes imply a bigger workforce and higher future growth.

Another positive sign is an evident increase in innovation. In 2017 Japanese companies filed 200,370 overseas patents, second only to the US. Improved corporate governance, higher profitability and bigger dividends are also encouraging.

The Topix index's 2.4% yield narrowly eclipses that of America's S&P 500 index. The central bank, moreover, continues to print money, which bodes well for asset markets.

Stocks are on sale

Japan has been deemed a bargain for some time, and now it is even more appealing. The Topix's constituents trade at an average forward price-earnings ratio of 12, a six-year low and a far cry from the S&P 500's 16. Two investment trusts to consider for 2019 are Baillie Gifford Japan (LSE: BGFD) and Fidelity Japanese Values (LSE: FJV).

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
America’s “SPAC” boom is coming to Europe
Stockmarkets

America’s “SPAC” boom is coming to Europe

SPACs are shell firms that list on the stockmarket in order to raise cash, then merge with another company. Once confined to the US tech scene, Europe…
4 Mar 2021
Why the classic 60/40 investment portfolio may no longer work
Investment strategy

Why the classic 60/40 investment portfolio may no longer work

The dramatic events in the bond market have thrown into question the classic investment strategy of the last 40 years. An investment portfolio made up…
1 Mar 2021
Expect more turbulence as the market calls central bankers’ bluff
Stockmarkets

Expect more turbulence as the market calls central bankers’ bluff

With bond yields climbing and stockmarkets sliding, markets are hoping central bankers will step in again to repress interest rates – but that won’t …
26 Feb 2021

Most Popular

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works
Bitcoin

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works

In the second in his series on bitcoin, Dominic Frisby looks at the blockchain – bitcoin’s unique underlying architecture – and what makes it and the …
2 Mar 2021
A beginner’s guide to bitcoin: how to buy bitcoin
Bitcoin

A beginner’s guide to bitcoin: how to buy bitcoin

For the novice, buying bitcoin can be a daunting prospect. Here, Dominic Frisby outlines the process from start to finish.
3 Mar 2021
Why gold has been such a bad investment so far this year
Gold

Why gold has been such a bad investment so far this year

Gold – the ultimate safe haven investment – is proving anything but safe. It’s lost over $200 an ounce since its high at the start of the year. Domini…
3 Mar 2021