Buy into Japan’s big bounce back

Japan © Alamy
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

While the rebound is good news, some economists fear China’s slowdown might limit Japan’s growth this year, with exports a weak point in the fourth-quarter figures. China’s softness is “ricocheting through Asia”, says Moss. “It’s hardly a shocker that a country with high exposure to the world’s second-biggest economy would be harmed by the slowdown there.”

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.

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%.