Week Ended: October 12, 2007

Japan Update

In general, the Japanese stock market has not performed well this year. A number of questions loom over the economy: With no sign of inflation, will an almost zero percent interest rate continue for the foreseeable future? Where is the job market heading?

In truth, the Japanese economy has been steadily expanding since February 2002—the longest expansion since 1945. GDP in 2007 is expected to grow 1.7% in the absence of domestic consumption; this anticipated growth is largely due to healthy corporate capital expenditures and rising exports to Europe and Asia.

Over 1,700 companies listed on the first section of the Tokyo Stock Exchange reported a 16.1% increase in recurring profit growth for the quarter ended June 30 compared to the prior year. Additionally, forecasts for recurring profit growth for the current fiscal year have increased from 7% in July to 9.7% at present.

Recent economic data suggests that the economy remains reasonably healthy: August industrial production rose 3.8% from July; household spending and retail sales were up 1.6%; the total number of jobless is at 21-month low. Importantly, some large companies have begun recruiting students who won't graduate until April 2009. Employment of new college graduates lagged in the nineties. However, the fact that employers are now recruiting two years in advance is a remarkable shift, reflecting the fact that there are two open jobs for every college graduate.

Regarding inflation, beginning this fall the price of many essential consumer products will increase for the first time in 17 years, including Cup Noodles (a Japanese staple), mayonnaise and toilet paper. The impact of these price hikes may result in a positive CPI number next year. However, consumers are already sensing signs of inflation in Japan, which in turn may lead the Bank of Japan (BOJ) to announce a much-watched rate hike sooner than expected.

Sources: Toyo Keizai, Wall Street Journal, Bank of Japan, CLSA Research

 

 

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The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information.