Japan's Economy Remains Resilient: 5 Great Picks
Zacks Investment Research | Mar 08, 2018 09:55PM ET
Japan’s economy grew faster in the last quarter of 2017 than initially estimated, according to a revised estimate. The world’s third-largest economy has now expanded for eight straight quarters. This marks the longest run of growth in 28 years, since a 12-quarter expansion ended in 1989, a period which coincided with Japan’s economic bubble.
The economy of Japan primarily grew on solid global demand for technological products that created an investment boom in Japan’s auto, semiconductors and machinery sectors.
Meanwhile, analysts believe that it’s quite unlikely that the Bank of Japan (BoJ) will consider doing away with its monetary stimulus measures, as low wage growth is preventing people from spending more and hindering an acceleration in inflation. Moreover, economists believe that Japan is on track for stable growth and remain positive about the longer-term outlook. Given this scenario, this is a good time to invest in Japan’s stocks.
Japan’s GDP Increases for Eight Consecutive Quarters
Japan’s economy grew at an annualized 1.6% in the fourth quarter compared with the preliminary estimate of 0.5% and came in above economists’ expectations of 0.9%. The growth was primarily driven an upward revision in key business areas. This also reflects a 0.4% quarter-over-quarter increase, up from the initial reading of 0.1% and above of the 0.3% pace registered in the third quarter.
The upward revision was primarily due to faster-than-expected gains in capital expenditure, driven by robust investment in technology, and information and communications like smartphones and production machinery such as robots and labor-saving technology.
Capital expenditure increased 0.7%, marking the fifth straight quarter of growth. Another key factor that contributed to upward GDP revision was a buildup in private inventory, caused by rising stock of crude oil and natural gas, steel products, electronics parts and devices.
Moreover, private consumption, which accounts for almost one-third of GDP, grew 0.5% against a contraction of 0.6% in the previous quarter and in line with preliminary estimates. Given this scenario, policymakers are keen on creating a virtuous growth cycle, wherein higher wages can act as a stimulus to increased consumer spending, which will help in giving a boost to business investment and accelerate inflation.
Bank of Japan to Continue With Monetary Stimulus
Japan’s current expansionary phase is a brainchild of Abe’s fiscal and structural reforms and the BoJ’s long running monetary stimulus program. In fact, BoJ’s governor, Haruhiko Kuroda, on Mar 2 raised investor concerns when he, for the first time, flagged chances of an exit from monetary stimulus if the 2% inflation target was met in fiscal 2019, a remark he later backtracked from.
It seems unlikely that the BoJ will roll back stimulus measures anytime soon, as achieving the 2% target is likely to take longer. And inflation won’t accelerate so long wages and private consumption remain sluggish. However, the expansion in consumer spending is an exceptionally positive development. This indicates that consumer prices are likely to pick up in the near future. Moreover, economists believe that Japan’s growth is on solid ground and pickup in wages and improving quality of jobs are resulting in higher consumption levels, which in turn is fueling economic growth.
Our Choices
Japan’s economic Zen is a result of the stimulus measures taken by Abe’s government and the BoJ. These measures are bearing fruit and the economy is likely to continue expending over an extended period of time. Moreover, given that it will still take some time to achieve the 2% inflation target, BoJ is unlikely to roll back the stimulus measures, marking a likely indication of continued growth.
Adding stocks from Japan to your portfolio looks like a smart option at this point. However, picking winning stocks may be difficult.
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