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

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement
Advertisement - Article continues below

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).

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stock markets

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
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

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
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
Visit/510135/trade-war-ceasefire-boosts-stockmarkets
Economy

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Visit/investments/commodities/gold/600686/gold-and-silver-bull-market-2020
Gold

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020
Visit/economy/600667/money-minute-wednesday-22-january-uk-public-borrowing
Economy

Money Minute Wednesday 22 January: UK public borrowing

Today's Money Minute looks ahead to the latest on of the UK's public finances, with the Office for Budget Responsibility’s forecasts for borrowing thi…
22 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600653/indias-small-and-mid-cap-stocks-are-set-for-big
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020
Visit/economy/600690/money-minute-thursday-23-january-european-interest-rates
Economy

Money Minute Thursday 23 January: European interest rates

In today's Money Minute we look ahead to Christine Lagarde's second interest-rate-setting meeting at the European Central Bank.
23 Jan 2020