Japan a rising sun or a shooting star?

April 26, 2013, 11:18 am Peter Switzer Yahoo7

Peter Switzer visits one of Australia's key export markets and examines whether Japan can be sparked out of its long period of decline.

Currently your correspondent is in Japan trying to get a real world handle on our second most important trading partner and an economy that has been in a slump and locked in deflation for around 20 years. And despite that, it’s still the third biggest contributor to world economic growth behind China followed by the USA.

So if the Land of the Rising Sun can throw off its shooting star status, as an economic miracle country that became a long-term loser, it will not only help the global growth picture, but also help us as a key export market.

The latest growth projections from IHS Global on the world economy predicts that this year it will be 2.6% going up to 3.4% next year. This should be a plus for stocks if these guys’ modeling is right.

Abenomics 101

Undoubtedly helping these better numbers for the global economy was the decision by Japan’s new Prime Minister, Shinzo Abe, to embark on a three-fisted assault on the demand deprivation that has locked Japan in a recession-like malaise for two decades.

It is so adventurous that the wild and wacky guys in the economics world have nicknamed it Abenomics!

Here the goal is to get the economy growing, and to help the cause, Abe has set a goal to achieve 2% inflation. He is also loosening up on monetary policy with the help of the Bank of Japan where they are parroting the US Federal Reserve’s quantitative easing or QE.

There will be an expansionary fiscal policy as well and already the yen has slumped which all should help economic growth. To fund the plan, the country’s consumption tax will go from 5% to 8% in 2014, so get travelling this year while the yen is down and our dollar is up. And by the way, the tax goes to 10% in 2015!

At this stage, the likes of IHS Global thinks Abenomics will work with predictions of 2% plus growth from mid-2013 extending into 2014.

Tough times for China

A rising sun for Japan comes as some are predicting tougher times for China and this largely explains why we saw some bad days on the stock market over the past week or so, but if Japan can come to the party with better growth, that will offset any possible pullback from China.

To be frank, I expect China to defy its critics as it has done for some time. IHS Global is singing from the same hymnbook.

While it recognises “the toxic mixture of rapid credit growth (fueled in part by capital inflows), rising property prices, and swelling local government debt,” it argues “the Chinese government will do nothing that will get in the way of the economy achieving 8%-plus growth in the near term”.

Positive outlook

So, if I add together an improving Japan to a more resilient China than what the current negative sentiment is suggesting right now, based purely on questionable analysis and ‘facts’, then we could see global growth come in higher than expected in 2013.

Better still, it could set us up for an even bigger and better year in 2014, which should underpin another good year for stocks.

Adding to this rosy picture is Japan’s participating in the Pan-Pacific Free Trade talks in Surabaya, Indonesia. Though Abe would have to fight entrenched industry interests, especially the unproductive Japanese farming community, it will be a part of his make or break attempts to force Japan to get real on what has held back the economy for two decades.

They might have modern car-making factories, but they have sidestepped making the country’s attitudes modern. They have tolerated inefficient overpaid farmers and allowed featherbedding — maintaining unnecessary jobs — in many business sectors, resulting in the continual battle with recession.

The goal

But this is the long game for Japan, while the short game will be whether its QE will work. The goal is lower yields on government bonds by driving up the price via the Bank of Japan’s big purchases. This hopefully will force financial institutions to think about lending to business or property players at higher rates, and this in turn will help turn those rusted big wheels of the economy.

I don’t want to think that this big punt by Abe won’t pay a handsome dividend as it will not only hurt Japan, but the global economy as well as my positive predictions for stocks.

Concerns about Europe

Against this, Europe remains a black cloud on the horizon and I’m hoping it will start breaking up over the course of this year. IHS Global is pessimistic on the EU noting that, “incoming data points to a Eurozone recession that will be deeper and longer. Spain and Portugal continue to struggle with debt problems, and there is no end in sight to Italian political paralysis.”

I hope they are too negative but I wouldn’t put my money on Europe as a bloc. It means, however, we need Asia and the emerging economies to ride to the world economy’s rescue, which will help us as a commodity economy.

Positive vs. negative

Another positive development from our northern neighbours was the Wall Street Journal’s report that said lenders around the world are, “fueling a boom in short-term loans across Asia, helping push debt to record levels as a burgeoning middle class strives for a better lifestyle”.

While it is easy to be negative about many economic challenges out there right now, the middle classification of Asia and the lower cost of energy because of America’s race to become more self-supplying of oil and gas are big demand and cost-reduction forces to keep my positive outlook for stocks believable.

Go China, go the USA and go the Land of Rising Sun!

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds - www.switzersuperreport.com.au

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