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Japan's economy has emerged from its deepest postwar recession
August 27, 2009

The Japan's economy expanded 0.9% quarter-on-quarter which is equivalent to an annualized rise of 3.7% in the second quarter of 2009. It was the first growth since the first quarter of 2008.We believe Japan has already passed its worst of the recession and is on course for a moderate recovery. However, Japanese market is not attractive in terms of valuation as compared to other Asian countries.


Author : iFAST Research Team



Untitled Document
Chart 1: Contribution to GDP Growth (QoQ Basis)
Chart 2: Concerns on Deflationary Pressure and Rising Unemployment

Key Points

  • The Japan’s economy expanded 0.9% quarter-on-quarter in the second quarter of 2009
  • The second quarter rebound was mainly contributed by exports
  • We concern about the deflation pressure and rising unemployment would drag down domestic demand
  • The valuation is not attractive as compared to other Asian countries

The Best-performing Developed Economy in 2Q

The Japan’s economy expanded 0.9% quarter-on-quarter which is equivalent to an annualised rise of 3.7% in the second quarter of 2009. It was the first growth since the first quarter of 2008, following the four straight quarters of contraction and the worst decline on record of 4% in last quarter. Although the figure was slightly lower than the market consensus of 1% growth, it makes Japan as the best-performing developed economy in the quarter. The expansion signaled that the economy has emerged from its deepest postwar recession and marked a weak economic recovery.

Table 1: Annualised GDP Growth (% Quarter-on-Quarter)
  2008 1Q 2008 2Q 2008 3Q 2008 4Q 2009 1Q 2009 2Q

Real GDP Growth

4.0 -4.3 -3.9 -13.1 -11.7 3.7

Household Spending

5.5 -3.9 0.5 -3.0 -4.7 -3.2

Residential Investment

19.5 0.2 14.8 10.8 -21.1 -33.0

Government Consumption

-1.3 -2.7 -0.8 5.5 0.4 -1.3

Public Investment

-12.9 -19.1 7.0 9.3 10.9 36.3

Exports

26.1 -15.5 -3.0 -44.3 -63.9 27.9

Imports

12.7 -11.7 0.7 10.3 -47.6 -18.9
Source: Cabinet Office Japan and iFAST Compilation

The second quarter rebound was mainly contributed by exports which jumped 6.3% from the quarter earlier. Net exports, or overseas exports minus imports, contributed 1.6% points to the expansion (as shown in chart 1). Domestic demand, which takes up more than half of the economy, rose 0.8% quarter-on-quarter and added 0.5% point to the growth. Local consumption has been boosted by the government fiscal stimulus which is worth 15.7 trillion Yen, or nearly 3% of GDP. The packages include subsidies to encourage the purchase of eco-friendly products and new autos. However, business investment, which accounts for 15% of the economy, dropped 4.3% quarter-on-quarter.

A Weak Recovery Ahead, Caution Remains

We believe Japan has already passed its worst of the recession and is on course for a moderate recovery. On a positive side, the resurgence in global demand will help to boost exports. Shipments abroad dropped 35.7% year-on-year in June 2009, the slowest pace in this year. Industrial production also increased on quarter-on-quarter basis for a fourth month in June 2009. However, we are still concerned that the deflation pressure and rising unemployment would drag down domestic demand in the coming quarters especially when the effects of fiscal stimulus is receding. Japan’s core CPI fell at a record pace in June and the price decline is expected to accelerate in coming months. Unemployment rate climbed to 5.4% in June 2009, the highest in six years and close to the record high of 5.4% in April 2003(as shown in chart 2). Therefore, Japan’s economy will still be vulnerable to the external demand.

Economy Hits the Bottom, But Upside Limited

We maintain our view on Japan which claimed in "Japan: Far From Full Recovery Amid Political Uncertainties" that the economy will start to experience a technical rebound in the current and next quarter reflecting a bounce back in inventory from nadir and the government’s huge fiscal spending. Afterwards, the GDP growth will likely to return negative or remain sluggish if the recovery in external demand does not take hold. Thus, it might be too early to tell that the Japanese economy has fully recovered.

Due to the huge drop in earnings and the low earnings base in 2008, we expect earnings growth in 2009 to rise drastically. The earnings growth in 2010 and 2011 are estimated to rise 94.4% and 28.8% respectively. Despite of the strong earnings rebound, the 3 year annualised expected returns is at 5.4% which is lower than the average of Asian countries. Estimated PE for Japanese equities is at 38X and 20X as at 21 August 2009 for FY2009 and FY2010(Fiscal Year Ended March 2009 and 2010), which is not attractive as compared to other Asian countries.



Related Information

Japan: Far From Full Recovery Amid Political Uncertainties



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