Japan’s recovery: this time it’s for real

By Euan Stuart Oct 31, 2005

The Japanese stockmarket has a long history of flattering only to deceive. Just look at its behaviour over the last decade: every couple of years it stages a splendid rally (up 53% in 1995/6 and 41% in 1999, for example), then it collapses just as dramatically (down 34% in 1997 and 40% in 2001). It seems to be up to the same tricks this year. Back in April, amid a flurry of optimism, the benchmark Nikkei index soared about 18% to 12,195.66. This time, said the traders, it’s different. But it seems it wasn’t. Now the index is, once again, mired below the psychologically important 11,000 mark and doesn’t look like it is going to break out again any time soon.

There are many who think that the Nikkei deserves to stay exactly where it is. Take Gary Duncan, writing in The Times. It may have looked like Japan had two consecutive quarters of potent expansion earlier this year, says Duncan, but recent data proves that that growth was a red herring. Last week, the authorities published revised GDP figures, showing a meagre expansion of 0.1% in the first quarter, following a “relapse” in the second, when the economy shrank by 0.1%. Taken together, these numbers left Japan once more on the brink of technical recession - two consecutive quarters of falling output.

It’s a “worryingly familiar” scenario, reminiscent of 1995, when recovery was scuppered as a slump in the dollar sent the yen soaring. Two years later, the Asian financial crisis, and a “startlingly ill-judged” increase in Japan’s sales tax, put an end to another upturn. And Japan’s luck was no better in 2001, when a US recession and another policy mistake (the premature end of Japan’s zero interest rates) once again “throttled” revival. This time, it’s clear that such up turn as there has been is reliant on exports. Now, as demand has fizzled in the face of weaker global activity and a rising yen, so the recovery has stalled.

But Duncan is missing something. The fact is that this time it is genuinely different. We can, for starters, pretty much ignore the GDP numbers. As Macquarie Japan analyst Richard Jerram points out, the way the figures are calculated has recently been changed, making it hard to make a “sensible comment” on them. And other numbers, such as business confidence, labour demand, profits and exports all point to nothing more than a “moderate” slowdown. The bears also need to bear in mind that Japan has achieved a great deal over the past decade. It has forced drastic corporate restructuring and all but eliminated the overhang of bad debts plaguing its banks. That gives it a stronger foundation for expansion than it has had for some time. The economy is also getting considerable assistance from the Bank of Japan. As Heather Stewart points out in The Observer, the bank has promised to maintain its current zero interest-rate policy until there is sustained positive inflation.

But the best reason for believing this recovery is for real is that Japanese consumers are beginning to venture back to the shops. In the 40-49 age group in particular, both incomes and spending are rising. As Japan’s confidence in its economic strength rises, that virtuous circle should become “self-fulfilling”. Japan has every reason to be confident about its economic strength - thanks to China. Japan has, as Jonathan Allum of KBC puts it - “by luck, judgment or just plain inertia” - found itself producing much of what China needs to grow (from steel beams to factory equipment). Add to that the general fact that any long period of minimal investment should be followed by one of expansion, says Allum, and Japan looks like it is in the early stages of a real recovery. And that is usually the time to buy.

Published in Stock markets | More articles by Euan Stuart

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