April was a very volatile month for investors in Japan. For the month, the Tokyo Second Market fell ...
April was a very volatile month for investors in Japan. For the month, the Tokyo Second Market fell by 2.2% and the Nikkei OTC by 1.9%. This has been part of the continued consolidation that investors in Japan have been witnessing during the first half of 2006. This was to be expected after the significant gains made last year, particularly the rapid move upward seen in late 2005.
The Japanese economy continues to do well. Unemployment is at a seven-year low and wages are slowly increasing, consumer spending, accounting for over 50% of gross domestic product (GDP), is finally recovering and retail sales for the recently-ended fiscal year are up, which is also encouraging.
Consumer spending is very important to the continuation of economic growth in Japan. On the whole, we expect GDP growth to remain strong for the next several years. There is little inflation on the consumer side and most of the pressure on wholesale prices can be explained by higher oil and raw material prices. Consumer spending, private capital investments and expanding exports are all pulling the economy higher. This is having a favourable impact on corporate earnings, which we expect to expand over the next several years.
The Bank of Japan has recently changed policy and is moving away from the quantitative easing that pumped around ¥40 trillion into the banking system. The days of deflation are over, the banks have recovered and the Bank of Japan is moving back to a more normal policy. It may have become more concerned about inflation, which remains low, but we believe that somewhat higher interest rates will have little impact on the current recovery.
Recently, both domestic and overseas investors are perhaps overly concerned with the change in Bank of Japan policy and the recent run-up in long-term bond yields. The yield curve has become steep and there are concerns that by August there will be a jump in short-term rates. These will probably begin to increase in a meaningful way by late summer but will remain low by any standards.
This outlook is not necessarily bad for the stock market. It indicates the economy is recovering and financial markets are returning to normal. The main potential negatives for the economy are outside factors including the possibility of higher oil prices.
We are now in the Japanese reporting season for the year ending March 2006. To date, results are inline with expectations with commodity-related companies doing somewhat better than anticipated. However, estimates are very conservative for March 2007 - it is normal of most Japanese firms, to project modest earnings growth even if a good year is expected.
Consumers are also spending more, but are demanding better quality design, service and lower prices. In fact, there has been a revolution taking place in the Japanese retail industry. This includes delivery, sourcing, inventory control and management. The better chains are now reporting positive same store sales growth. This, along with new store openings and higher profit margins is resulting in some very good earnings growth for selected companies.
Despite the recent fall in stock prices and the period of consolidation, we are far from discouraged and expect the market to move higher between now and year end.
The outlook for the Japanese economy and corporate earnings is the best in years, being underpinned by future capital investment programmes, company hiring plans and improved consumer confidence.
Tokyo Second Market falls by 2.2%
Unemployment at seven-year low
Corporate earnings best in years
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Square Mile’s series of informal interviews
Fallout from Haywood suspension
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£80bn funds under calculation