Economic recovery in Japan 1 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Japan's economy has been in the doldrums since its fall from grace in the early 1990s following the asset and property bubble of the 1980s (see my blog The Japanese bubble economy). Some call the 1990s Japan's "lost decade". Deflation has been the chief economic problem hounding the world's second largest economy, as the excesses of the 1980s worked themselves off slowly through a vicious spiral of declining prices causing a "poverty effect" (as opposed to the "wealth effect" where enriched masses spend more during bull markets) which in turn further dampened demand.

This deflationary process has progressed on to this day but there are signs that Japan's domestic economy might finally turn the corner. A recent survey in September showed Tokyo residential and commercial land prices rising year-on-year for the first time in more than 15 years. Elsewhere, outside Tokyo, land prices still continued to fall, albeit at a decelerating rate. The recovery in Tokyo's land prices was attributed to better business optimism and higher investments, and does suggest that the property market might be turning the corner. Incidentally, this trend of high-end property prices leading the recovery is similar to Singapore's market, where prime downtown condominium developments have been snapped up eagerly in recent months while the HDB flat market remains stagnant.

One can look at other indicators for clues. The stock market is often a leading economic indicator; Japan's Nikkei has risen about 14% since the start of the year. The economy grew at an annualised 3.3% in the April-June quarter. Given such signs of an end to the deflationary spiral, there seems to be a strong case for an upturn in domestic consumer sentiment, especially when near-0% interest rates provide loose credit. On the investments side, the rise of the two Asian giants China and India, particularly China, must surely be beneficial economically for Japan's manufacturers and exporters, despite all the overblown political troubles with the former; the external business environment looks optimistic enough for Japan's big electronics and industrial machinery firms to increase capital investments further.

The long-term picture looks good. Japan's government under Koizumi has obtained a decisive mandate to go ahead with reforms starting with the postal office, which locks up a large proportion of savings and allegedly serves as a source of funds for politicians to do favours for business associates. This has distorted resource allocation and many foreign investors view the planned privatisation of Japan Post as a positive first step in unravelling the incestuous links between government and big business, leading to more optimal investments in the long term. Already, the drive for reform has led to plans to trim 10% of the government's work force over the next 5 years in a bid for leaner government. All this suggests the government's determination to restructure the Japanese economy.

Given the recovering consumer sentiment and business optimism, supported by ample liquidity and a restructuring story, and it being the second largest economy in the world, I would pounce at the chance to buy Japan if it were a stock in itself. In this case, I would of course buy a country fund specialising in the country.

References:
(1) CNN report Sep 20 2005: Tokyo Land Prices in Rare Rise