Buy into Japan’s big bounce back

published 22 February 2019

935_MW_P05_Markets — The world's third-largest economy is getting unstuck

"Japan isn't stuck in a hopeless demographic-driven hole without escape," says Daniel Moss on Bloomberg. In fact, growth in the world's third-largest economy (after the US and China) rebounded strongly in the fourth quarter thanks to solid spending by households and businesses. GDP growth hit an annualised rate of 1.4% last quarter, following a 2.6% contraction in the third quarter.

Consumption, which accounts for nearly 60% of GDP, grew by 0.6%, while capital expenditure rose by 2.4% as companies"shook off the effects of natural disasters", says Megumi Fujikawa in The Wall Street Journal, and started spending again. A typhoon and an earthquake had previously closed an airport and left the island of Hokkaido without electricity for two days.

Japan: not all about exports

But as newsletter The Blah's Jonathan Allum points out, Japan is not the export-dependent economy that many people still appear to believe. "I suspect that too many look at the economy through the prism of the stockmarket, which over-represents manufacturing companies that derive much of their income from overseas," he says. Economically, it is a different story. Exports only make up 16% of Japan's GDP, according to World Bank data. Japan is at a "crucial moment of transition from overseas to domestic demand", Barclays analysts Tetsufumi Yamakawa and Kazuma Maeda told the Financial Times.

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There are other encouraging aspects. Corporate governance is getting better. The economy is virtually at full employment the unemployment rate is 2.5%, while more women have joined the workforce thanks to labour-market reforms. And having long opposed any form of immigration, the government is granting foreign workers short-term visas to help out the tightest sectors, such as healthcare and tourism. These changes imply a larger workforce and higher future growth. Innovation is increasing too. In 2017, Japanese companies filed 200,370 overseas patents, second only to the US.

The good news for investors is that this has yet to be priced into markets. The Topix index's constituents trade at an average forward price/earnings ratio (p/e) of 12, a six-year low, and much cheaper than the S&P 500 in the US. There are many funds available one option is the Fidelity Japan Trust (LSE: FJV), which trades at a discount to the value of its underlying portfolio of just over 11%.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..