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Japan goes into recession again--but some Japanese stocks are now bargains
05/23/2011 4:24 pm EST
Japan’s GDP contracted at an annualized rate of 3.7% in the first quarter of 2011, the Japanese government announced on May 19. That follows on a 3% annualized decline in the fourth quarter of 2010. The first quarter drop was about twice the expected decline.
But Japan is really going through two separate recessions.
First, there’s the short-term recession caused by the destruction and disruption of the March 11 earthquake and tsunami. When companies such as Toyota can’t run their factories at full speed—if they can run them at all, GDP falls. Typically, a disaster like this winds up first depressing GDP for at least two quarters because of lost economic activity and then adding to GDP as the country rebuilds. In April Japan’s government approved $50 billion in earthquake relief and reconstruction spending. I’d expect to see second quarter GDP take an earthquake hit too—electricity supplies still haven’t been completely restored—before reconstruction spending starts to kick in.
Second, there’s the long-term recession. Even in recovery Japan’s economy has never established the business and consumer confidence needed for a long-term growth. The ratio of bank loans to deposits started the year at just 72%, a 60-year low. There’s plenty of money for borrowing in Japan but no one—neither businesses nor consumers--wants to take out a loan to expand a business or to buy a car. As terrible as the government deficit is, Japan’s private sector is sitting on net assets of almost $33 trillion (at an exchange rate of 82 yen to the dollar). That’s a tremendous amount of wealth that hasn’t been invested in increasing the growth of the economy. Instead much of it is sitting in Japanese government bonds, U.S. Treasuries, or pension-savings accounts paying 1% or less. I don’t know how you create the confidence in the future that’s required to put this money to more productive use, but that confidence is simply lacking in Japan. A survey taken four days before the earthquake showed just 8% of those surveyed expected the economy to be better in a year.
I think it’s worth investing in Japanese stocks now—they’re extremely cheap—for the recovery from Recession No. 1 in the second half of the year. I'd include exporters such as Canon (CAJ), Komatsu (KMTUY), and Toray Industries (TRYIY) that will be helped by the cheap yen.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Canon, Komatsu, and Toray Industries as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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