Japanese stocks have bounced over the past few days. Global jitters over the US Federal Reserve reducing its money-printing programme have eased, as has China’s credit squeeze. This has helped all equity markets, but the latest data from Japan itself has also cheered investors.
The quarterly Tankan survey of business sentiment this week revealed the first positive reading for large manufacturers since 2011. Deflation is easing and the slump in the yen has propelled corporate profitability, measured by the profit-to-sales ratio, to a five-year high. Companies are thus now in a position to pay their employees a bit more: mid-year bonuses are expected to rise by 7.4% this year, the biggest increase since 1990. Unemployment remains at a four-year low of 4.1%.
All this helps explain why consumer confidence has hit a six-month high. First-quarter GDP growth has been revised up to an annualised pace of 4.1%. So ‘Abenomics’, the government’s three-pronged drive to escape deflation and stagnation by printing money, fiscal expansion and structural reform, seems to be fuelling confidence and strengthening a rebound that began last year. The jury will be out for some time on whether Abenomics can really shake Japan out of the slump, but in the meantime the stockmarket outlook remains bullish. The Bank of Japan is printing money “on a scale that makes the Fed look like a model of caution”, says Martin Spring in his On Target newsletter. The plan is to double the size of the monetary base in just two years to 54% of GDP. The latest comparable figure for America is 19%.
That implies further weakness in the yen, which is still historically expensive against the dollar. That’s good news for the heavyweight exporters in the stockmarket. Earnings in the broader Topix index are rocketing. They are expected to expand by 57% in 2013, thanks to the yen’s weakness, a foreign acquisition spree by Japanese firms, and their efforts to become leaner and meaner in recent years.
“Ongoing structural change” at Japan Inc has been “underappreciated”, says Adrian Hickey of Pictect Asset Management. Because firms’ yen forecasts are “pretty conservative”, there’s scope for positive profit surprises, adds Kuninobu Takeuchi of Diam Co. Throw in valuations that are still cheap, and the bull run of the past few months has further to go.