Eyes on Corporate Earnings in Japan

Taku Arai, Product Manager of Japanese Equities, Schroder Investment Management

By Emily Lai

Japan’s economy is once again contracting after 2 quarters of positive GDP results. The country’s Q2 GDP shrank at an annualized rate of 1.6%, a huge drop from the revised 4.5% expansion in the first three months of the year. On a quarter-by-quarter basis, growth declined 0.4% in the second quarter.

Japan’s growth data has been highly volatile, with two quarters of contraction followed by expansion for the same period of time and then back to contraction again. However, Taku Arai, Product Manager of Japanese Equities at Schroders tells Benchmark he is still optimistic about the economy. “We think the negative GDP growth for 2Q 2015 was in line with the market consensus. This would be a temporary economic drop and we can expect a pick-up in the next quarter. We remain positive on the macroeconomic trend in Japan,” he says.

Breaking down the figures, consumption of households in Japan fell 3.1% on an annualized basis in the second quarter. The rise in sales tax from 5% to 8% since April played a part in contributing to the inflation that curbed consumption. “We had expected wage growth in real terms would become positive from April onwards, but it has been weak due to relatively solid inflation and weaker than expected nominal wage growth,” says Arai. “We need to see a further increase in nominal wage to offset the impact from inflation, and that can be possible given the tightening labor market in Japan.”

Japan’s exports rose 7.6% year-on-year in July, higher than the median estimate for 5.5% annual growth expected by economists in a Reuters poll, but still shows sign of slowing down from a 9.5% rise in June. The dollar-yen rate has been hovering around 123 to 124 levels during the period, which is about a 3% drop since the beginning of the year, and currency is not the factor bringing weak exports. Instead, a weak global economy, especially in China, is the main damage.

China is the main export destination for Japanese exports. The figure rose 4.2% in July from a year ago, slowing down from a 5.9% increase in June. Shipments to Asia rose 6.1%, also slowing down from June when two-digit growth of 10.1% was seen. The only market showing signs of optimism is the United States, where exports data improved to an 18.8% growth from 17.6% in June due to higher demands for cars and medicines

“The slowing down of the Japanese economy would not be a big issue for Japan as it can be short term,” says Arai. “The biggest risk in investing in Japanese equities would be external events, such as changes to the Chinese economic condition and the US Fed’s actions, which will impact the yen movement.”

He shares with Benchmark that he will continue using a bottom-up strategy to locate investment opportunities in Japan, paying special attention to companies with solid corporate earnings, bearing in mind that macro factors, such as consumption, CAPEX, yen level and external economies can highly affect the performances of the companies. BM


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