From 1981 to 2010, Japan’s average GDP growth was 2.2% with a high of 9.4% in March 1988; but this seems to be the distant past, based on the soft projections going forward.
In the second quarter, the Japanese economy grew at a meager 0.3%, well below the 0.6% estimate and the promising 1.3% in the first quarter. Over the past decade, the Japanese economy has expanded at a snail’s-pace average of 0.2% quarterly. Japan is blaming the stagnant growth on the stalling in Europe, and the high level of the yen and its impact on exports.
And just like the U.S., Japan relies on domestic private consumption that accounts for about 60% of the economy versus about two-thirds for the U.S.
Japan was the second largest economy in the world prior to being surpassed by China in 2010, but China has its own issues. (Read “China Scrambling for Economic Remedies.”)
Japan finds itself with unemployment at over four percent, something that was not a norm in the country’s boom days. In June, the unemployment rate was 4.3%, which is much better than the 8.3% in the U.S. but well below the long-term average of 2.7% from 1953 to 2012.
The higher value of the yen also makes it tough for Japanese exporters and is preventing an export-led recovery for the Japanese economy.
By comparison, China is strong, since its yuan is undervalued, which aids the country’s exports and builds on its massive trade surplus.
It will continue to be difficult to make money in Japan.
And with the risk in China, you can take a look at the four “little tigers,” comprised of Hong Kong, Singapore, South Korea, and Taiwan.
Nevertheless, you should not give up on the Japanese economy. There are some good buying opportunities. I like the major Japanese stocks, including Mitsubishi UFJ Financial Group, Inc. (NYSE/MTU) and Sumitomo Mitsui Financial Group, Inc. (NYSE/SMFG), which are interesting bank plays.
Billionaire and investment guru Warren Buffett said the weakness in Japanese stocks provides a buying opportunity. My view is that you should probably stick with the blue chips.
The key in Japan will be government spending to drive the Japanese economy renewal, including new buildings, roads, and various infrastructures. This means demand for concrete, steel, and other building materials. An infrastructure buildup also means workers will need to be hired.
Other than the banks, you want to look at infrastructure stocks, not only in Japan, but also those of global companies operating in the U.S., such as Jacobs Engineering Group Inc. (NYSE/JEC) and Fluor Corporation (NYSE/FLR). You also want to look at companies that provide the building materials, such as concrete, steel, and other building materials.
There may be a light at the end of the tunnel, but for the Japanese economy, it’s quite dim at this time, as it has been for over 20 years. Stick with China.