As with Hurricane Katrina, the earthquake was not just a Japanese concern but an immediate cause for global sorrow; such is the impact of the modern 24-hour news media. I’ve personally never been to Japan, but like anyone with a TV that day I’ve seen a disaster unfold in real time.
Having been an investment journalist for the past six and a half years, I’ve written my fair share of articles on the Land of the Rising Sun’s premature “new dawn” so, whilst maintaining sensitivity to the circumstances, the rebuilding of Japan provides a much needed fresh narrative for investors in understanding Asia’s most forwarding thinking economy.
The general consensus is that, despite relatively attractive valuations, the Topix and Nikkei are being held back by the strengthening yen which is weighing heavily on its exporters. 2012 has been more positive, though the indices have hardly filled investors with much confidence.
Longer-term worry
For Shogo Maeda, head of Japanese equities at Schroders, there are still some good reasons for optimism with growth having resumed in recent months, albeit slow, while wages are beginning to recover and consumer sentiment is improving.
“When the earthquake hit, the longer-term worry for both the equity market and the economy was that earnings power of Japanese companies had been severely damaged – however, this has not happened,” he asserts.
“Corporate earnings have shown, and are further expected to show, a significant recovery during the year. Corporate Japan continues to advance as historically high levels of free cash flow continue to be generated and returns have bounced back following the disaster.”
Encouraging signs these may be, though I’m not sure it will be enough to encourage asset allocators to take an overweight stance. The real issue for Japan continues to be its ongoing 20-year plus struggle with deflation. As one economist remarked to me recently during a discussion on the UK, if inflating yourself out of an economic slump is easy, then Japan would have done it years ago.
Strengthened political will
Still, the political will for change appears stronger than ever now with the Bank of Japan having recently signalled a move to a more aggressive monetary policy with an increase in asset purchases by ¥10trn. The Bank’s governor Masaaki Shirakawa’s has said he is determined to continue monetary easing until it reaches a 1% inflation target. Others have called for this target to be doubled.
With the West still crippled by debt and growth in emerging markets having cooled, we should not underestimate the major influence Japan still has on the global economy. Investors would more than welcome a resurgent Japan and, by means of our Panasonic TVs and Sony laptops, the world will be tuning into much clearer picture of its recovery.
