The economic policies of the current Japanese Prime Minister, Shinzo Abe, seem to be working. The long dormant Japanese economy picked up steam in the first quarter of the year. Growth for the first months of 2013 was at an annualized rate of three and a half percent. For an economy that has been fighting deflation for two decades this is spectacular. Exports went up nearly four percent as the Yen weakened, as planned. Is it time to invest in Japanese economic growth as a weakening Yen makes Japanese products more attractive? Not only is Japan selling more products overseas but consumption is up at home as well as the Japanese consumer is beginning to see the light at the end of a really long tunnel. When considering if it is time to invest in Japanese economic growth fundamental analysis of various Japanese exporters might be a good idea. Mr. Abe, Prime Minister since December of 2012, has announced a three pronged approach to solving the economic dilemma of deflation. These include legislative changes to make the economy more competitive, a big increase in government spending, and pumping money into the economy at home. The baseline goal of this policy is to create inflation at a two percent rate by next year. The principals expect to double the Japanese monetary base. The first steps in this process have reduced the value of Yen against foreign currencies by a fifth in just six months since it started. This, by itself, has been great for exports. If this continues the Yen will fall farther making it time to invest in Japanese economic growth by way of the likes of Toyota or Sony. Add this to good offshore investment ideas. Other large Japanese companies that are not household names in the West include the following:
- Nippon Telephone and Telegraph
- Mitsubishi Corporation
- Honda Motor
- Mitsui and Company
- East Japan Railway
- Nippon Steel
- JFE Holdings
These companies deal in products and services across the board. Knowing which are likely to prosper under the new economic policy will be useful to know if it is in fact time to invest in Japanese economic growth.
What Went Wrong
Japan had policies over the years that encouraged its citizens to save. By the 1980s there was a lot of money in Japan and too much money drove real estate as well as stock prices to unsustainable levels. In addition, there were far too many badly structured loans. Real estate in central Tokyo went for as much as a million and a half dollars a square meter. As the Tokyo real estate and stock markets collapsed trillions of dollars of equity were erased from the books. One eventual result of Japanese economic woes was the carry trade in which investors converted Yen to other currencies in order to gain a better interest rate offshore.
And What Is Being Put Right
Investment is coming back to Japan as seen by a nearly fifty percent increase in the Japanese stock market since Mr. Abe started his policies. A fiscal stimulus program in the multi-billion dollar range is in effect. Economists in Japan expect at least three years of consecutive economic growth. If this is true there is still time to invest in Japanese economic growth despite the recent rise in the stock market in Japan. The third leg of the policy is two items. First it is to open the Japanese economy to the outside by lowering traditional trade barriers. Second, Japan needs to have a more flexible and thus more competitive labor market. If Mr. Abe can push this last pair of policies through into law it well may be time to invest in Japanese economic growth and for years to come. If that happens we may choose to rewrite our advice about investing in foreign stocks.