This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.
Japan’s economy has shrunk for the second quarter in a row, meaning the country is officially in recession. The economy shrunk by 0.2% in the three months to the end of September, following a decline of 0.2% in the three months to the end of June.
Although the recession was expected, following a drop in corporate expenditure, it is disappointing, and will probably signal more stimulus from the Bank of Japan.
Michael Stanes, Investment Director at Heartwood Investment Management, commented: “The Bank of Japan is likely to take further policy steps to try to entrench the more positive attitude of consumers and of the corporate sector. We expect a supplementary budget in the near future.”
Do Not Confuse the Economy with the Stock Market
This is the seventh recession in Japan in two decades; a pretty depressing statistic. But Simon Somerville of the Jupiter Japan Income fund says that investors should not be overly concerned.
“Using GDP growth to determine the investment prospects of Japan is the wrong measure,” he said. “The population is declining – this will always mean slow to no growth. I expect we will see an eighth and a ninth recession in the future, but the stock market may well rise through these periods.”
What Next for the Japanese Economy?
Unlike in the US and UK where Central Banks are winding down economic stimulus, in Japan there is considerably more to come.
Andrew Wells, Global Chief Investment Officer for Fixed Income at Fidelity said that slow growth and disinflationary forces should see Japan and the eurozone embark on additional stimulus in the next 12 months in a bid to encourage capital expenditure and boost stubbornly low inflation.
The Bank of Japan may well announce a new round of quantitative easing as early as December.
In the meantime, says Adrian Lowcock of AXA Wealth, Japan remains attractively valued, particularly following the sell-off following concerns of the strength of the Chinese market over the summer.
““The recent earnings season saw further stock buybacks, continued pressure to reduce cross shareholdings and to improve return on equity as the corporate sector continues to restructure,” he said.
“But concerns weigh on the region. As such we prefer more defensive areas and domestic consumer sectors over exporters.”
Stanes concluded: “Abenomics is not dead. In the short term anaemic global growth is weighing on activity but the direction of travel remains positive and we continue to see opportunities in Japan.”
