Talk about a collapse. Japan’s economic performance in the first quarter was nothing short of awful.
GDP fell by 4% during the first three months of the year. That’s a 15.2% annualised decline, the worst Japan has ever seen, bar none. Exports were down 26% on the quarter while consumer spending slid as unemployment went up.
So why do we think that now’s a good time to buy into Japan?
Why Japan’s a mess
We’ve been fans of Japan for a long time here at MoneyWeek. But there’s no doubt that the economy is doing appallingly badly right now.
It didn’t have a housing bubble, and its consumers didn’t get themselves into ridiculous levels of debt. Its financial sector didn’t get itself into trouble with fancy derivatives – they were still too badly scarred from their own post-bubble collapse throughout the 1990s and noughties.
And yet the country is still experiencing a deeper slump than anyone else. Why?
It’s pretty straightforward. This was a global bubble. When people on one side of the world stuff their pockets with credit, they need things to buy. When they’re not trading houses with one another, they’re snapping up electronic gizmos and new cars. And that means demand for imports soars.
So countries such as Japan, China and Germany saw demand for their manufactured products shoot up as a direct result of the Western property bubble. And of course, they were happy to meet it.
But now that the global economy has slumped, so has demand for those exports. And the disruption in the credit markets also hit the availability of trade credit, which is effectively the lifeblood of global trade – it allows exporters to be sure they’ll get paid, and importers to know they’ll get their goods (you can read more about how trade finance works here – Is international trade grinding to a halt?).
With trade credit availability drying up, global trade has slumped harder and faster than ever seen before. And thus exporters such as Japan – and Germany in particular – have really taken a hammering.
Japan could escape recession before anyone else
So far so grim. But you may have noticed something odd. When those shocking first quarter GDP figures came out, the stock market in Japan actually rose. That’s because investors were surprised the figures weren’t even worse.
And the good news is that many expect the second quarter to be much better. In fact, Julian Jessops at Capital Economics reckons that Japan could even return to growth in the second quarter, which would make it one of the first of the major economies to stick its head out of recession.
Why will things improve? It’s mainly down to the fact that while demand for goods has slumped, supply has fallen even faster. Companies have shuttered factories and laid people off with unusual alacrity, partly because of the tightening of credit availability. So now that the rate of decline in demand is easing off (as it ultimately has to) there’ll be a bounce, and suppliers may find that they need to un-shutter some factories and increase working hours again.
That’s not to say that things will rebound back to the good old days of rampant spending and free credit. Far from it. We’re looking at a long period of much weaker demand, and a lot of restructuring to be done by both consumer countries and exporters. But Japanese companies have been through such hard times already that they’re used to this business. If anyone can thrive – or at least survive – during tough times, then it’s they.
And given the choice, would you rather be a consumer-based economy, faced with creating new productive industries from scratch? Or an export-based economy, with a high level of high-end manufacturing expertise, faced with simply trying to find new customers, perhaps by encouraging your own citizens to part with some of their savings more readily? I know which position I’d rather be in.
The Japanese stock market still looks cheap
But this is all economics – what about the market? Well, we’ll be looking at this in greater detail in the next edition of MoneyWeek, but suffice to say that even after the recent rally (the Nikkei’s up by around 30%, roughly the same as most other global markets) the Japanese market still looks cheap – the cheapest major market in the world in fact. We’ll look at why, and how to play it, in the next issue.
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Is international trade grinding to a halt?
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