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Outlook on Japan
Japan’s gross domestic product fell at an annualized rate of 2.4% for the second quarter of the year, marking the first negative growth in five quarters. Weakness was seen in various areas of GDP, but deterioration in terms of trade, caused by rising raw material prices, had the largest negative impact. This has weighed heavily on Japan’s growth. The decline comes as June’s core consumer price index (excluding fresh foods) experienced an increase of 1.9% year over year, the highest level in 10 years. Surging energy prices and a widespread appreciation in food prices were the main culprits. Higher materials costs are also plaguing many Japanese companies, which haven’t been able to pass on cost increases and are also seeing weaker sales figures. Earlier in the year, Japanese consumers appeared to be weathering the global economic slowdown, but as workers continue to see shrinkage in salaries and bonuses, they have subsequently tightened spending. Both consumption and investment contracted in the second quarter, and may continue to experience significant headwinds. The struggle also continues for property-related companies as many experience trouble obtaining credit. So far this year, there have been 60 real estate-related bankruptcies, compared with 27 for the same period last year. Saddled with debt of 256 billion yen (US$2.3 billion), property developer Urban Corp. collapsed this week, becoming Japan’s largest corporate bankruptcy of the year. Some relief, however, may be forthcoming in the property sector. Tokyu Land, Apollo Global Management and other companies have announced plans for new real estate funds to buy property. Of perhaps greater significance is that the Japanese government seems poised to make some positive moves for the longer term: last week, Liberal Democratic Party Secretary General Taro Aso, often mentioned as a possible successor to Prime Minister Fukuda, proposed making dividend income of up to 3 million yen (US$27,500) per year tax free. Also, Japan is expected to unveil details for an economic stimulus plan next week. There is even talk of cutting Japan’s high corporate tax rate, which has hindered the country’s competitiveness. Finally, the sharp decline in commodity prices such as oil, natural gas, copper and wheat comes at a fortuitous time for resource-poor Japan. At the same time, the recent appreciation of the U.S. dollar is good news for Japanese exporters.
Single country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific sector or geographic region. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information. |
