Japan’s recovery on track despite China volatility

China’s recent market volatility and devaluation of the Yuan has sent global markets into a spin and Japan has not escaped unscathed. However, while Japanese exports may have taken a hit from weakening demand from the Asia region, prospects for recovery remain intact.

A gradual growing U.S economy combined with low oil prices paints a positive picture for Japan. Stable export demand from the U.S for large vehicles, for example SUV’s, have seen orders rise, providing a buffer to losses stemming from China’s fall out.

One particular case in point is Fuji Heavy Industries, which has experienced an annual auto sales increase of more than 10 per cent. A key contributor to this growth is the expansion of its Subaru car sales operation in the U.S where it has increased sales over a period of six consecutive years. Fuji Heavy Industries had historically based its Subaru automobile designs on Japanese standards and tastes. It was only after a shift by the company to embrace US demand for larger car models in its automobile planning and development activities that its sales began to increase at a notable rate.

Some sectors in Japan make a compelling investment case. As China shifts towards a more consumption-oriented economy, the consumer sector remains particularly attractive. Food companies, such as Ajinomoto and Ezaki Glico, as well as baby goods makers such as Kao Corp. (paper diapers) and Pigeon Corp. (feeding bottles), are key beneficiaries of this trend.

At the heart of it, growth drivers for Japan remain in place. The successful implementation of long-term structural reforms such as the corporate governance code has stoked expectations for increased corporate earnings growth. Additionally Prime Minister Abe’s Abenomics track record presents a strong case for Japan.

Inflationary expectations are on the rise in Japan, negating the need for the Bank of Japan to conduct further quantitative easing programmes. The key to Japan’s future lies not in stimulus, but in the full actualisation of structural reforms stemming from the third arrow of Abenomics. Japan has made significant progress in opening its markets up for more business. With an increase in its strategic special zones, its shareholder focused stewardship and corporate governance codes, and return on equity (ROE) focused JPX Nikkei 400 index, its long-term investment case is only getting stronger.

In order to ensure that Japan’s economy is fully resuscitated, a certain level of wage increase must be considered, thereby resolutely laying the ground for stronger consumption. Only then will we see the target 1.5 per cent GDP growth. The flip side of the coin is that rising inflation will pressure real wages and the economy will taper.

Like any other market Japan is not immune to volatility. However the well laid groundwork of Abenomics is one that ensures for a full recovery. The current picture may be one of a work in progress, but Japan remains on the right track.

 

Genzo Kimura is an economist at Sumi Trust

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