Japan is now back in recession after a brief recovery which lasted only six months. GDP has now fall...
Japan is now back in recession after a brief recovery which lasted only six months. GDP has now fallen for two consecutive quarters, according to figures released on 13 March.
However, this so-called 'technical recession' seems to be at odds with most monthly data, and few people feel it is an accurate reflection of the market's underlying realities.
We think the confusion stems primarily from the inadequacies of the collection and construction of Japanese data series, coupled with the tendency for Japanese economic figures to be somewhat dated - often reflecting the Japan of the previous two decades rather than their modern, 21st century counterparts.
Confusion aside, we still remain optimistic about the Japanese economy, and there are a number of series which point toward continued expansion.
Chief among these is the tertiary sector index, which used to be produced on a quarterly basis but is now released monthly.
This continues to show steady economic expansion and figures for February reveal that 60% of the economy covered by the series was expanding at around 2.2% year on year.
Of particular interest is the strong expansion in the communications sector, which is currently growing at more than 20%.
The industrial production series - the twin series to the tertiary sector index - also shows strong recovery.
Looking forward, the key growth catalyst is likely to be the expansion of IT investment in Japan.
One of the main features of the 1990s was the expansion of IT investment in the US and the relative lack of it in Japan.
Ironically, at the time, there was much criticism about the paucity of spending on Y2K at home but, after the non-event of the millennium bug, attention is now focused more fully on spending for business purposes.
Investment to enable greater usage of the internet is also likely in the near future, and domain name registration is currently growing at around 10% month on month.
Call charges for connection are likely to fall significantly, too, in the coming year, and there are already clear signs of accelerated IT spending. The recovery could add between 0.6% and 1.0% to growth over the next couple of years.
Overall, the sectors that are exposed to the fast growing components of the economy - communications and IT - performed well last year.
These companies now account for more than a third of the Topix index and shares in many of them have been re-rated, making it all the more important that profit growth continues.
In this environment, our bias is toward companies with good top-line growth or credible restructuring plans.
George Veitch is fund manager at Baillie Gifford
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