Japan’s longest period of post-war economic expansion has come to a “juddering halt”, says Lex in the FT. Growth slipped by 0.1% quarter-on-quarter between July and September after a 0.9% slide in the previous three months, marking the first two-quarter decline since 2001. “Consumers of all stripes are basically on strike”, while capital investment slid and overseas buyers bought fewer goods. As the economy is “so sensitive to the global business cycle”, says Hiromichi Shirakawa of Credit Suisse, it looks set to contract further as the global downturn bites.
Exports were down by 10% year-on-year in the first three weeks of October, says The Economist. Toyota forecast a 74% decline in net profits in the year to next April, due partly to the stronger yen, which has hampered exporters by rising almost 10% since September as the carry trade has unwound. Overall earnings look set to fall 26% in the year to April. Given this backdrop, it’s no wonder the Nikkei 225 index has lost over 40% this year; it touched a 26-year low last month.
But it’s hardly all gloom and doom. Falling commodity prices should ease the squeeze on consumers and provide scope for consumption to rise. Moreover, not only do households have plenty of savings, but unlike their Western counterparts, Japanese companies have spent a decade shedding debt and have been through a painful restructuring process – streamlining operations and labour forces – over the past few years.
Japan has “worked the bad debts out of its system”, says Martin Hutchinson on Seekingalpha.com. It will be some time before other major industrialised economies can say the same. Growth seems unlikely to contract as sharply next year as in the rest of the industrialised world – as Capital Economics says, “the economy is in relatively good shape”. Given that Japan is perched on the rim of the world’s most dynamic region and its companies are strong enough to “take advantage of global distress”, it is “well positioned for the next upturn in the cycle”, says Pinakin Patel of JPMorgan Asset Management. And valuations are “cheaper than they have ever been”, says Patel. More than 70% of firms on the broad Topix index trade below book value. Peter Tasker of Dresdner Kleinwort notes that Japan’s dividend yield has hit around 2.8%, higher even than during the “chronic deflation and financial crisis of the 1990s”. Local investors have noticed that shares are “so cheap that investors are wanting to get back into stocks”, says Mitsushige Akino of Ichiyoshi Investment Management. As the carry trade is unwinding, local investors have turned from currencies to equities. Individual investors bought a net $10bn of stocks in Tokyo last month, compared to $2.1bn in September. They offset net selling of $7bn by foreign investors.
Only 9.5% of household wealth in Japan is held in shares, compared to 29% in America, and retail investors own a mere 18% of the market (down from a third in the 1970s), compared to overseas investors’ 28%, as Capital Economics points out. So there is plenty of scope for retail investors to keep returning to stocks and thus bolster the market. High yields certainly bode well in this regard, says Peter Tasker. With Japan’s economy comparatively sound and domestic investors finally returning, Japan is still the only market that should be on equity investors’ radar screens.