September 2011

Japan’s economy contracted in the first half of 2011 due to the devastating natural disasters that struck the country on March 11th. Damage to factories, supply chain problems and power supply shortages all prevented companies from producing and selling goods, whilst consumers held off spending their money. However, since then economic activity has rebounded strongly. Companies have restored their operations and consumers have been spending again. This should lead to a strong economic environment in the second half of the year.

The biggest threat to Japan’s economy is now deteriorating conditions overseas. We have seen a significant slowdown in growth in much of the developed world since the summer and this will likely lead to a weak external demand environment. This would hurt the Japanese exporters, who in turn could reduce domestic investment and employment. The domestic economy would therefore also suffer as a result.

However, supportive government policy should help to counteract this threat. The Bank of Japan is set to maintain loose monetary policy going forward. Furthermore, we are likely to see details of a major “earthquake reconstruction” fiscal stimulus package in the near term. Analysts believe that net fiscal spending will add at least 1% to GDP growth in 2012, and so, as a result, Japanese economic growth should be firm next year.

The global economy has slowed significantly over recent months and equity markets have been sold off. Japanese market valuations are now extremely low by historic standards. Going forward we feel that global economic conditions will stabilise. We also believe that Japanese growth will be firm, supported by government policy. As a result, we are positive on the outlook for Japanese equities.

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