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Market views - JAPAN

JAPAN

March 2010

For the majority of 2009 the Japanese market performed poorly relative to its peers. However, the market jumped in December after the Bank of Japan eased monetary policy and stated that they wanted to see and end to deflation. Performance remains firm, and the market has had a bright start to 2010.

Japan is historically a big beneficiary of global growth. Initially exports strengthen due to greater demand for Japanese goods overseas. Later, the domestic economy improves as exporters raise wages, hire more workers as their new wealth gets recycled around the economy. Company earnings grow, the performance of the economy improves and the market often outperforms.

This pattern looks to be occurring at present. With respect to the economy, conditions were severe at the start of 2009, but it emerged from recession in the second quarter as exports started to recover. The economy contracted again slightly in the third quarter as export strength could not make up for depressed domestic demand. However in the fourth quarter, Japan recorded solid growth as both exports remained supportive and domestic demand finally started to recover. If global growth continues to remain firm in 2010, we feel that the Japanese economy can continue to improve as domestic demand strengthens further.

Against the background of weak global and domestic growth at the start of 2009, Japan moved back into deflation. This was negative for the market and remains a problem now. However, we feel that deflationary pressures may ease going forward. One reason for this is that since the end of 2009 the Bank of Japan and government have claimed that they want to see an end to deflation. The Bank of Japan has indeed eased monetary policy in recent months. However, perhaps a more influential reason may come in the form of rising inflationary pressure overseas. The Japanese CPI has been positively related with inflationary conditions of its trade partners in recent years (with China being Japan’s largest trade partner). We feel that this relationship could continue and may eventually lead to price increases in Japan. If Japan moves from a deflationary to an inflationary environment, it will be very positive for the market.

As well as monetary easing, the Japanese economy continues to see support from fiscal spending policies. Recent examples include subsidies on environmentally efficient housing and the initiation of monthly payments to families with children. At a time when other countries are looking to tighten policy and remove stimulus, Japan is easing monetary and fiscal policy. This could support both the economy and market.

Continued strength in global growth would benefit the Japanese economy at a time when monetary policy and fiscal policy are supportive. Deflationary pressure could ease due to inflation overseas. Market valuations are towards the lower end off their historical range. Under these conditions, we feel that the market could continue to perform well in the first half of 2010.

Page last updated April, 2010 ID1722