Japan eyes export recovery to lift mood

This article is part of
The Guide: Investing in Asia

Japan eyes export recovery to lift mood
 Japan’s Shinzo Abe hopes improved economic conditions in Donald Trump’s US will lead to better export figures for Japan

Higher export volumes have helped Japan’s economy continue its improvement, with growth of 1 per cent (annualised) during the December quarter.

This marks the fourth quarter in a row in which Japan’s economy has expanded owing to a boost in export volumes. Corporate capital expenditure also rose 0.9 per cent. This growth, however, has been offset somewhat by weaker domestic spending, with some concerned that the benefits of prime minister Abe’s stimulus package have not yet made their way through to the Japanese consumer. 

Policy measures cannot change everything and prime minister Shinzo Abe’s policy settings appear to have been implemented well. But markets in Japan do not like instability and the fact that investment markets are supportive of the Liberal Democratic Party, possibly allowing prime minister Abe to run for a third term, is evidence of that. 

Economic conditions in the US continue to improve, with increased employment and higher wages resulting in a rise in consumer spending. This rise in consumption has led to an increase in imports, predominantly from Japan and China. There were some concerns within Japan’s government around comments made by president Donald Trump during his election campaign, and the effect that his government’s shift in fiscal policy will have on Japan’s economy.

However, prime minister Abe was one of the first foreign leaders to meet president Trump one-on-one, and it can be surmised that Japan may work closely with the US for their mutual benefit, which could include Japan taking the lead on the trade relationship. 

It is expected that Japan will continue to be an export-driven economy through 2017, with rising volumes suggesting that global demand will continue to improve. Japanese exporters of machinery, predominantly to the US, and electronic parts, mainly computer and smartphone-related parts to China, should be the main beneficiaries of this improved demand.

Importantly, this demand could also provide an opportunity for these exporters to expand their production capacity through an increase in capital expenditure, which would also help to drive employment and wages higher. 

As this export-led demand helps to drive the domestic recovery in Japan and inflation rises, investors can also expect the Japanese financial sector, mainly the larger retail banks, to benefit. With Japan being mired in a deflationary environment for close to two decades, local banks have found it difficult to generate consistent earnings growth, especially when lending rates are so close to deposit rates. 

This new inflationary environment, one that could extend into early 2018, should allow Japan’s banks to drive loan growth and expand home mortgage volumes, an area that has been weak for some time. 

Moving into 2017, the continued recovery in Japan’s economy is expected to be driven by three factors:

1. An ongoing recovery in global demand

Japan’s economy should continue to benefit from rising global demand, with increased volumes, rather than prices, resulting in higher wages and bonuses, which in turn should drive domestic consumption.