Inflation is the only possible solution to Japan's bad debt crisis, according to Smithers & Co, beca...
Inflation is the only possible solution to Japan's bad debt crisis, according to Smithers & Co, because the taxpayer will not be asked to shoulder the ¥120 trillion burden.
The reach of the bad debt crisis, which has been dragging down the banking sector, is all pervasive, says economist Andrew Smithers, with many Japanese companies carrying high levels of leverage continuing to make losses.
He says: 'Japanese companies' poor profitability is the result of the rapid past growth of the economy. During periods of rapid growth, low returns are normal.
'Now that Japan is a mature economy, however, low returns can no longer be balanced by a rising real exchange rate. We estimate that at least ¥120 trillion of bad loans to corporations need to be written off by the banks as a result.'
He adds: 'We do not believe the taxpayer will be asked to support banks with enough money to make this feasible. We therefore expect no solution to the banks' bad debts to be possible other than by inflation.'
Natasha Chetwynd, head of Japanese equities at Britannic Asset Management, says the Japanese market is very confused at present.
One of the important events taking place at the moment is the turmoil in the banking sector. 'I'm quite amazed at the extent of the fall in the banking sector,' she says.
'The Japanese government has appointed a taskforce to deal with the situation and some believe that it will come out with hardline proposals such as accelerating bad debt write-offs.
'If there is a hawkish policy that accelerates bankruptcies, I would expect there to be a negative effect on consumption.' That would exert a drag on growth in the economy, something the Japanese government looks unwilling to tolerate.
Accordingly, her position in the Japanese market is broadly neutral across all sectors. Chetwynd says she did have an overweight position in interest rate sensitive sectors but this has been trimmed back.
'For now we are sticking with companies with strong balance sheets or companies that are restructuring,' she adds.
Sectors she likes at present include telecoms, where she holds Japan Telecom and NTT DoCoMo. 'We believe there is still growth to be had in the mobile industry and valuations are cheap,' she says.
Simon Donne, manager of the Threadneedle Japan Growth fund, says the Japanese economy is weak but stable.
'Consumption in Japan has been hit for years and the consumer has had many years of low growth in their wages. There were signs earlier this year that things were getting better but wages have started to stagnate again so I don't think consumption will take off.'
Donne is similarly bearish on the banking sector, but, on a positive note, he says the large retailers have had strong sales recently and while returns have been very low they are positive for the first time in four years and have recovered from lows of around -4%.
Another positive aspect to this sector is that as the market is domestic the large retailers carry no currency risk nor are there political issues clouding the picture.
Economy stable though weak.
Retailer growth positive.
Expected growth in telecoms.
Banking sector troubles overshadow economy.
Continuing low growth rates.
Uncertain outlook in sector.
Our weekly heads-up for advisers
'Nothing can prevent scammers developing workarounds'
Stalwart Scottish Mortgage takes third place
Consistency and compliance vs. slower reaction time
Search for replacement to begin imminently