Fidelity’s June-Yon Kim looks at Japan a year on from disaster
One year on from the devestating earthquake and tsunami in Japan, Fidelity’s June-Yon Kim gives a view on the outlook for the country’s equity market.
After the March earthquake, the Japanese economy plotted a v-shaped recovery as supply-chain disruptions were quickly resolved and manufacturing facilities were brought online ahead of schedule.
In Q3 2011, Japan’s real GDP increased at an annualised rate of 5.6%, showing a marked turnaround from a -2.0% contraction in the previous quarter.
Following the strong rebound in Q3, however, economic activity has tapered off. While domestic supply-side constraints eased, external events including supply-chain disruptions stemming from the floods in Thailand and the sovereign debt crisis in Europe negatively affected Japanese exports.
While the slowdown in overseas economies and the delayed start-up of reconstruction projects is hampering output temporarily, production activity should gradually return to a recovery path. Forecasts for December and January point towards positive growth and are consistent with recent improvements in both the Institute of Supply Management’s New Orders Index for US manufacturers and the Chinese Purchasing Managers’ Index.
The outlook for Japan
The post-earthquake impact on the Japanese equity market eased off by early August, as industrial production recovered to 95% of its immediate pre-quake level and the Japanese corporate earnings revision index reached its post-quake peak.
However, the European debt crisis fuelled the increase in risk aversion among international investors and exerted further negative impact on the Japanese equity market performance since September 2011. Since then, the Japanese market has underperformed other developed markets in dollar terms.
In the near term, the Japanese market is likely to remain vulnerable to concerns about the sovereign debt crisis in the eurozone and the potential for further downward revisions to fiscal 2011 earnings guidance. Sentiment among Japanese companies remains low in light of a persistently strong yen, but post-quake reconstruction demand from both the public and private sectors is expected to cushion against external headwinds in the first half of 2012. Furthermore, we are seeing some signs of improvement in US economic indicators, and China has started to shift away from its policy of monetary tightening.
As demand conditions improve and Japanese companies regain ground lost in 2011, corporate earnings should see a firm recovery through 2013. We expect the Japanese equity market will eventually catch up to other developed markets once an earnings recovery in 2012/13 comes into view and global macro conditions stabilise.