Japan – The Giant Awakens

21 May, 2014 –

by Ziv Nakajima-Magen – Manager, Asia-Pacific @ Nippon Tradings International

Marc Wiersum (MBA) is an equity analyst, private banker to hedge fund managers and investment advisor, with deep and diverse experience in both Japan and the USA, covering the better part of the last 25 years. He has recently published a series of articles on “Market Realist”, all collated under the title “Japan’s Business Conditions haven’t been this Good for a Decade”. In the series, Wiersum collates, analyses, predicts and comments upon various economic indicators currently being observed in Japan’s economy at great length – all of which are of great interest to those currently invested in, or considering to invest in the land of the rising sun – and so I thought it of value to try and present you with a (not so brief) summary of some of his key points, and include pointers to some of the news items he bases his analysis on, many of which we’ve published here previously.  

Business Sentiment & Growth Back on Track

Japan PropertiesWiersum points to a dramatic improvement in business conditions in the country over the last few years – owing mainly to PM Shinzo Abe’s election in 2012, and his mandate of economic recovery, aimed at pulling Japan out of its two decades long deflationary cycle. Abe’s “Three Arrows” policies, consisting of monetary, fiscal and regulatory/social re-structuring seem to be doing the job so far. Policies such as inflation targeting, currency depreciation, negative interest rates, QE, expansion of public investment, BPJ bond buying operations, and revision of the Bank of Japan Act have already been enacted – with more contentious and deeply-rooted issues such as labour and farming laws reforms, support of more women in the workforce and an increase in immigration currently on the government’s plate. The results have been generally positive – large manufacturing companies have rebounded strongly, the Japanese yen has weakened significantly, making a major contribution to the growth in profitability among Japan’s exporting companies – and although Calendar 4th quarter GDP has been weaker than expected – the latest numbers have seen the economy grow at a stellar 5.9% annual rate – outpacing China, Japan’s biggest and most worrying competitor. While a large part of this growth – the fastest rate in three years – can be attributed to the impending hike in consumption tax, which has gone up to 8% in April – such a leap forward seems to suggest any “hangover” effect can be quickly mitigated.

Real Estate in JapanIt’s also important to note, Wiersum adds, that the non-manufacturing sector has outpaced manufacturers on the recovery for the first time since Japan’s bubble economy burst in 1990. This, he explains, points to a fairly broad-based recovery in the country.



Credit as a Growth Driver & Expectations for Profits

In the next sections, Wiersum notes the rise in credit availability from Japanese banks – nearly the best since 2007 – combined with the country’s renown, close to zero interest rates, the huge amounts of cash held by local companies, and the growing profits noted above, general business environment and equity market conditions seems to be extremely positive and growth-supportive, for the first time in a long time. Furthermore, he notes, corporate expectations for further expanding their profits are slightly over 40% – a level of extreme positive sentiment last observed in 2001 – over a decade ago. However, the caveat attached is that these expectations are closely tied to the assumption that the JPY will further weaken, to remain over 110 per USD, and hopefully drop further, towards 120 or beyond. As the weakening yen is the main driver of exports profitability, it is expected that the Bank of Japan with expand its QE program further, should this not eventuate – certainly, if the yen does not continue to soften, growth expectations would be hampered.


Economic Intervention Still in the Cards

Further elaborating on this last point above, Wiersum notes that Abenomics, and indeed all of Japan’s economy, are currently in “roll-out” mode. The Bank of Japan, he ventures, is well aware of the tight rope its’ currently walking – attempting to devaluate the currency just enough so ignite a 3-4% growth with a benchmark 1-2% inflation, without inadvertently causing a currency collapse. With one hike in consumption tax already enacted, and another one in the cards for 2015, it is now time for policy makers to sit back and allow things to take their course. Should GDP and wage growth not follow closely on the footsteps of increased taxation and rising profitability, he notes, it is very likely for the Bank of Japan to announce further expansion of its QE program later in the year, or in early 2015. As of this moment, the Japanese, jaded and pessimistic after two decades of deflation, have been “selling” Abenomics to the world, with foreign investors, who are more optimistic about the country’s potential in coming years “taking a bite” and buying into the projected recovery – but as mentioned several times above, a large measure of the potential success of this exercise would depend on whether or not further attempts to devaluate the JPY will succeed.

Real Estate in Japan Summary

With core inflation currently up to 1.5%, business sentiment, productivity factors, profitability, growth and credit availability all on the up, for the first time in many years, it would seem Japan’s current fiscal and monetary policies are taking hold, at least in the short term.

(Source – “Market Realist“, Pics – Up Arrows / FutUndBeitl , Port of Kashii, Fukuoka, Japan / Richard West)

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