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Japan Outlook 2019: Moderate growth peppered with solid investment opportunities

Publication Date: 09 Jan 2019 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav S.

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Japan’s economy is likely to see moderate uptick in 2019, while the country’s companies should maintain robust earnings growth, according to a leading market expert. 

In a recent note forecasting a real GDP growth rate of 0.8% for Japan, Katsunori Kitakura, lead strategist at Sumitomo Mitsui Trust Asset Management (SMTAM), said: “In 2019 the country’s capital investment should increase, supported by strong corporate earnings. 

“Household income should also rise due to a tightening labour market. As a result, consumption is likely to follow the same upward trajectory, reflecting an unchanged but positive outlook for Japan’s economy.” 

He attributed the GDP growth rate slowdown (from +1% in FY 2018) to the consumption tax hike scheduled by the Japanese government for October 2019, which will raise tax from 8% to 10%. 

“However, the impact of this on GDP and households should be subdued as multiple measures to reduce this burden are planned, including lower tax rates on food and benefits for pensioners, as well as free tuition for pre-school education.”

Looking at the global environment, a number of overseas risks could also factor in decelerating Japan’s economy, such as the US-China trade wars, uncertainty over Brexit negotiations, and Italy's budget problem.

SMTAM expects the Bank of Japan (BoJ) to maintain the status quo, while the US Federal Reserve will continue to raise rates but at a gradual pace. US-Japan interest rate spreads “should widen” and the yen might weaken, with Kitakura forecasting a USD-JPY range of 110-120.

“We believe it would be difficult for the BoJ to start tapering by raising long-term interest rates, given the uncertainties overseas and the rise in consumption tax rates in Japan. Therefore, we expect the central bank to maintain the current monetary policy until the beginning of 2020, including the negative interest rate of -0.1% imposed on part of its current account and the 0% target level for long-term JGB yields.”

The Japanese equity market should see continued political stability and monetary easing by the BoJ, the SMTAM expert added. “Strong earnings growth is set to continue and therefore we expect the Nikkei 225 to trade between 21,000 and 25,000.” 

However, there are some key events taking place in 2019 which might affect the equities market both on the upside and downside, such as the Japanese local elections in April; the abdication of the current Emperor followed by the enthronement of the new Emperor in May; the Upper House election in the summer and the introduction of the consumption tax rate raise in October. 

Kitakura also expects to see some stimulus policies to boost the domestic economy ahead of the 2020 Olympic Games in Tokyo. 

“Looking at investment opportunities, three sectors which stand out are automation, technology and healthcare. There are many innovative businesses in these areas which offer solutions to Japan’s social problems and will be key contributors to issues such as labour shortages and the country’s growing ageing population.”

He cited Keyence (TYO: 6861; maker of factory automated equipment), Daifuku (TYO: 6383; automation and logistics solutions provider for e-commerce), M3 (TYO: 2413; medical-related information provider) and global pharmaceutical company Daiichi Sankyo (TYO:4568), which has developed anti-cancer drugs that have undergone successful clinical trials, as stocks to look at.

“Considering the volatile global landscape, investors should select stocks that are less affected by external events, offer competitive products and/or services and have consistent, strong earnings growth to obtain higher returns – and many Japanese companies are able to offer just that,” Kitakura concluded. 


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