Japan’s economy has been plagued with stagflation and deflation for years. Although Prime Minister Shinzo Abe has sparked hopes of an economic turnaround, the progress has been slower than expected. However, there are some catalysts that may help the country outperform in the coming years.
Japanese stocks have largely underperformed U.S. equities. The dollar has given up much of its gains between January 2017 and May 2017. But the U.S. Federal Reserve has indicated that it will continue raising interest rates. The Bank of Japan, on the other hand, will likely keep interest rates low. These dynamics may potentially help boost Japanese equities in the near future.
A weaker yen will help Japanese exporters become more competitive in global markets, including the U.S., to boost corporate profits.
Prime Minister Shinzo Abe’s economic policies, better known as Abenomics, were slow to start, but there have been some real improvements in the underlying economy. The prospect of higher inflation may boost the outlook for Japanese stocks and the economy as a whole. An end to decades of stagflation and deflation could bring foreign investors back into the market.
An uptick in tourism may also help stimulate the economy. Earlier in May, stocks of the cosmetic makers Kose Corp. and Shiseido Co. rose after the Japan National Tourism Organization announced that the estimated number of foreign visitors and scheduled Japan tours reached a monthly record high in April.
Japan has another advantage that may attract foreign investors: stable companies – particularly in the technology field.
Japan has long been a leader in technology and robotics. This has been largely achieved through medium-sized firms as opposed to giant multinational corporations. Many Japanese companies use their own factories to manufacture high-end components, and they usually own their own supply chains. The strength of these companies lies in their employees.
Foreign investors may find Japan’s medium-sized companies to be attractive opportunities for stability. Fast-growth companies, on the other hand, are more susceptible to crashes.
Japan still faces several challenges in the coming years. An aging population is creating a demographic problem that can only be resolved through immigration reforms. The country also has high levels of debt compared to its GDP.
Further monetary stimulus is possible, but experts say that fiscal intervention is more likely.
Japan’s move to expand restrictions on foreign investments in IT firms may be a slight blow to the economy. The move is intended to prevent the outflow of sensitive information and technologies to other countries, including China.
The Japanese government is expected to add 15 industry sectors, including computer manufacturers and mobile phone manufacturers.