Soft Japanese GDP masks equity growth potential

Japan’s economy shrank by 1.1% in Q4 of 2015 (less than the anticipated 1.4%). But there are clear signs the world’s third-largest economy is turning a corner, says Kenta Ichikawa, deputy director-general, Finance Bureau, Ministry of Finance of Japan. He spoke in Toronto on Tuesday at an event held by the Investment Industry Association of Canada (IIAC) and the Japanese Securities Dealers Association.

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Ichikawa says the country’s Gross National Income (GNI), which includes both domestic and overseas earnings of Japanese corporations, has grown consistently. Government of Japan data shows real GNI was just over 505 trillion yen in Q1 of 2011, and it’s now at about 538 trillion yen (up ~6.5%); real GDP, by contrast, started from about 505 trillion yen in 2011 and now sits at about 527 trillion (up ~4.4%).

Those figures should interest equity investors.

“[GNI’s] better performance relative to GDP reflects […] Japanese companies’ strong earning power in the global market,” Ichikawa says. “Despite recent market fluctuations, I am bullish on the Japanese economy.”

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He says the fundamentals of the Japanese economy are solid. In addition to upward-trending corporate earnings, capital investment has rebounded. And “the labour market is very tight. […] [The] current unemployment rate is 3.3%—that’s almost full employment.” Consumption “may seem somewhat sluggish,” which is understandable given a 2014 consumption tax increase from 5% to 8%. But the tax hike isn’t the only reason for the drop-off, Ichikawa stresses. Weak income growth also contributed to the soft consumption data.

To address this, Prime Minister Shinzo Abe “strongly urged business leaders to raise wages,” notes Ichikawa. “Business leaders responded to it positively, but until quite recently wage increases failed to catch up with price increases. […] We expect that further improvements in real incomes will stimulate further consumption.”

Between corporate earnings, capital investment, wages and consumption, “positive cycles are finally developing in the economy.” A reduced corporate tax rate, plus an expected 13.6-trillion-yen (2.6%) boost to GDP thanks to the TPP agreement, are also positives for Japan, says Ichikawa.

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