Japan remains in the doldrums. Growth is to be slow over the next year and a stronger yen is putting...
Japan remains in the doldrums. Growth is to be slow over the next year and a stronger yen is putting a hamper on exports.
Andreas Schuster, fund manager at F&C, says the first quarter GDP result of 5.7% was a lot higher than anticipated. He thinks GDP will be revised down for the next quarter.
According to Schuster, the methodology used to work out GDP for the first quarter cannot be viewed as reliable.
He says the GDP figure was based on the figures obtained in the household consumer spending and export components of the survey. However, the sample used for consumer spending was very small and only surveyed 1,000 households which does not give a very accurate representation of all consumer households in Japan.
The export component of the survey was undertaken when the yen was much weaker, adds Schuster. This meant exports were cheaper to sell outside of Japan and this area saw an increase in sales. Since the first quarter, the yen has strengthened and made a 7.2% gain in the past two months. This could make it harder for exports to be sold overseas.
Kevin Hebner, chief investment officer at CrÃ©dit Suisse Japan, agrees GDP figures are unreliable. He predicts the next figures will be lower. Although the global environment is improving, it is not enough to lead Japan out of the doldrums. His GDP forecast is between 0.5% and 0.7%.
Hebner also thinks the weaker yen may have an impact on the auto industry that was helping to pull Japan out of recession.
He says improvement in domestic consumption is unlikely. Consumer spending accounts for 55% of GDP and without improving, Japan's economy will remain in the doldrums.
A lot of the economy is struggling with bankruptcy, says Schuster. Banks have structural problems and are writing off bad debts. He forecasts a slow recovery as consumer spending has not turned around yet.
He thinks the unemployment level is too low and many people have given up looking for work. He says there will be an increase in people looking for work as companies are cutting down on personnel.
However, Hebner forecasts a possible improvement in capital expenditure in the fourth quarter, but it is unlikely growth will be high. He says the Japanese economy still faces many problems. There has been a lack of fiscal stimulation by the government that is needed to restart the economy. The government has also failed to give details of tax cuts that are meant to form the cornerstone of the latest efforts to get the economy moving.
fund manager comment: Threadneedle
There has been much press about how Japanese equities had hit a 17-year low. Articles appeared in the Economist, Business Week and Forbes while even London's Evening Standard ran to four pages as to why Japan was crumbling. Bedevilled by ballooning government debt, a fragile financial system and a prime minister akin to Don Quixote, a frequent joke was: ˜What's the difference between Japan and Argentina? Five years.'
The flood of magazine articles coincided with the point of maximum bearishness and the market rewarded those brave enough to take the contrarian view with a 24% gain through to May, plus an extra 7% for sterling investors as the yen strengthened. Since then, continued weakness in other major equity markets has caused a sharp two-thirds pull-back in Japan even though the background for Japanese equities has been improving.
This year we have seen the Japanese economy begin to recover. Inventories and industrial production, which had fallen to 13-year lows, are rebounding. Export growth is positive again thanks to the economic recovery around Asia.
Japanese companies, thanks to massive write-offs in the fiscal year ending March 2002, are set to move from an aggregate net loss to a net profit. Earnings estimates have been rising for three months. Companies that have taken restructuring seriously are beginning to reap the benefits, and this goes deeper than the widely-quoted example of Nissan.
Not all the news is good. While the cyclical recovery has started and corporate attitudes are improving, Prime Minister Koizumi has had little success in implementing real structural reforms. He is facing stiff resistance from his own party and from the ministries. Longer-term investors need to be aware that although the economic recovery buys Japan a little more time, the structural problems have not yet been solved.
Simon Donne is a fund manager on the Japan desk at Threadneedle Investment Services
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