JETRO Focus Newsletter Jan 2006

JETRO's Focus Newsletter series provides readers with a bi-monthly snapshot of Japan's macroeconomy, as well as other important topics and trends. It is designed to analyze current developments, including those relating to Japan's economy, its business, financial, investment and political environment, as well as relevant social and cultural themes. 

Recent editions have covered issues including rising entrepreneurship and investor interest in Japan, the economic integration of East Asia, changing business and corporate practices, structural and corporate reform and the potential impact of postal savings reform. Subscribe online to JETRO Focus

       Download January 2006 newsletter (1.33 MB) 

Japan Proved a Source of Eye-Catching Returns for Investors in 2005
The Japanese stock market had a remarkable run in 2005, with the Nikkei 225 alone recording a 40 % increase in yen terms, its best performance since 1986. Not only did this market perform extremely well in absolute terms, but it also exceeded those of other developed economies.

Japan's Economy Ended 2005 on an Encouraging Note
One extremely important theme that emerged in 2005 was the stabilization or slowing of deflation. On the banking front, end-of-the year data was also positive. Other bright spots include stronger industrial activity and greater consumer as well as business confidence and spending.

Transformation of Japanese Corporate Sector is Helping to Create a Virtuous Cycle
Facing lean economic times as well as severe overseas competition, Japanese companies have moved to transform themselves. They have reduced debt, downsized their workforces, and closed plants that no longer bolster the bottom line. The Japanese banking sector also has been consolidating.

Increased Business Profitability is Supporting Capital Investment and Innovation
Increased profitability coupled with strong exports and an improving domestic situation has given Japanese businesses newfound incentives to invest, which they have embraced with gusto. Capital spending surged by 9.6% in the third quarter year-on-year, the tenth straight quarter of expansion. Japanese firms have been investing not only in plant, property, and equipment, but also in R&D.

Profits also Serve as a Catalyst for M & A Activity
Coupled with strong share prices and shareholder pressure, profit growth is also encouraging Japanese firms to make acquisitions. In 2005, the value of Japanese M&A surged to $167.6 billion, representing a 100%+ increase year-on-year.

Strong Corporate Performance is Bolstering Hiring, Wages, and Consumer Spending
Companies are now reported to be more willing to employ full-time versus part-time workers. As a result, college graduates face the best job market in a decade. Furthermore, the job-to-applicant ratio in October rose to its highest level in almost 14 years. Winter bonuses grew by 3.5% in 2005 over the prior year. This was the biggest gain in 14 years.

Japan Continues to Pursue Necessary Policy Changes
Many commentators were pleased by Japanese Prime Minister Koizumi's massive electoral victory on September 11 when the Liberal Democratic Party won an outright majority in the lower house of the Japanese Diet. In addition to plans to totally privatize Japan's $3 trillion Japan Postal Savings System by 2017, the Japanese government is also moving to cut state spending and implement many other reforms.

Livedoor Investigation Points to Encouraging Trend
An investigation into the activities of Livedoor, an Internet portal company, in regard to suspected market irregularities, unsettled both foreign and domestic investors this month. Notwithstanding the circumstances surrounding this particular incident, investors with a long-term perspective understand the importance of investigations of this kind. They serve to both hinder fraud and to provide a framework that develops precedents, case law, rules-based guidance and public debate.

Domestic Investors Drive Further Growth in Japanese Stock Indices
There are signs that Japanese investors are becoming more willing to assume risk. This is encouraging, and more bullish fund managers, believe this trend will accelerate as pension funds gravitate to the improving returns and the accelerating pace of corporate buy-backs, restructuring announcements and other positive developments.

The Odds Favor Continuing Economic Growth for Many Years to Come
While additional consolidation is a distinct possibility, this would only serve to help sustain the progress that has been achieved and would not disturb the underlying positive trend. It will also allow entry for a new group of investors who have been waiting for a better buying opportunity.

Japan Introduces Catalysts for Further Recovery and Reform
Investor and business interest in Japan remains strong -- backed by solid macro, industry, and firm-level data. While acknowledging this strong performance, some analysts have begun to question whether Japan can build on this positive momentum, and if so, what will be the factors that will sustain this advance moving forward.

Analysts Seek to Identify Catalysts that can Sustain Japan's Recent Advance
Strong Japanese stock market performance in 2005, record corporate earnings, and evolving monetary policy have caused some analysts to question whether there are additional upward gains still to be achieved in Japan. This has led some strategists such as JP Morgan's Hajime Kitano to suggest investor's lock in their profits.

Japan Offers Positive Economic Data on Many Fronts
In the 4th quarter of 2005, Japan's economy grew 1.4% (5.4% annualized), a rate far greater than the 0.3% experienced in the U.S. and 0.4% experienced in the European Union. Japan's 4th quarter performance derived largely from domestic sources such as consumer spending and business investment.

End of Quantitative Easing in Japan and its Implications
In response to the positive news regarding the end of deflation as well as Japan's solid economic performance, the BofJ moved on March 9th to end its quantitative easing (QE) policy, initiated in 2001 to support a troubled financial system, combat deflation, and facilitate government and corporate borrowing.

Corporate Change and Restructuring Continues
Even before the BofJ moved to end QE, many Japanese corporations had begun to take steps to rationalize their operations, enhance their domestic and international competitiveness, and increase their returns to shareholders.

Japanese Government Moves to Improve the Business Environment
The Japanese government continues to adopt, and implement a variety of policies designed to improve the environment for foreign and domestic business. Heizo Takenaka, Minister for Internal Affairs and Communications, for example, revealed in a Financial Times interview that he had convened a special taskforce to investigate how Japan might reform business practices and regulation in the telecommunications and media sectors to double or even quintuple revenues for players in these sectors.

Japan Further Develops Its Capital Markets and Security Regulation Infrastructure
Akira Kojima, Chairman of the Japanese Center for Economic Research and a Special Editorial Advisor to the Nihon Keizai Shimbun, wrote in the January/February 2006 edition of Japan Economic Currents that Japan had to develop its capital markets to ensure funds were available for risk takers and firms with an entrepreneurial spirit.

Japan Continues to Present Exciting Opportunities for Discerning Investors
Analysts such as Robin Griffiths at Rathbones Investment Management, continue to see opportunities in Japan for lucrative gains, both in respect to the market as a whole and especially in sectors such as retail, mining, property, and financial services.