Japan shaping up as sexy story say German investment bankers

By Yoke Har Lee

Move aside Uncle Sam. The Japanese economic recovery is happening but there are still many doubters in the world.

Up to a few weeks ago the Federal Reserve was one of those who was unsure if Japan's rise was for real, said chief economist for Dresdner RCM Global Investors Andrew Hunt.

He is forecasting a 3.5 per cent gross domestic product (GDP) growth for Japan for this year and more of the same next year.

"There will be a big surprise," he told the Business Herald.

"The Japanese economy is growing faster than most people are anticipating." Market consensus is that Japan's economy will grow around 1 per cent.

"First quarter growth was 1.8 per cent, second quarter growth 0.3 per cent and third quarter forecast is around 1.5 per cent. Unless my math is seriously wrong, the economy is going to grow around 3 per cent," he said while in Auckland yesterday.

He and colleague Campbell Gunn, who is head of equities and chief investment officer for the company's Japan office, made presentations to retail and institutional clients on why Japan is a sexy story.

Mr Campbell is looking for a compound annual rate of return of 20 per cent a year from the Japanese stock market for the next few years. He cautioned that the Japanese stock market is faced with a plateau after its rises. Foreign institutions have been net buyers in the Japanese stock markets this year.

The Nikkei 225 has risen to around 18,210 from its low of 13,232 in January. However, the smaller-capitalised stocks have far better growth rates against the large-cap stocks.

"We think there will be economic and earnings surprises and we are looking for the next upleg [in the stockmarket] next year," Mr Campbell said.

According to Mr Hunt, up until two weeks ago, the US Federal Reserve, did not actually believe the Japanese economy could keep going. "They have just completely rewritten their forecast for Japan," he said, adding that Japan's economic recovery would throw off the supply and demand equations in the world, with the Anglo Saxon world suffering as a result. This was reminiscent of what happened during Japan's last economic growth.

Japan's recovery, he said, was a result of government action. After much procrastination, the Bank of Japan made moves to stimulate the economy, including injecting liquidity into the asset markets.

Easier liquidity had also helped the cashflow of Japanese companies. Employment had risen and Japanese consumers were starting to save less.

"People don't realise it yet - the Japanese media still don't have much about the recovery. But the warehouse stocks of Japan has gone down 11 per cent this year. Yet Japan has produced 8 per cent more goods (during the same period). That roughly means about 10 per cent more goods coming out of Japan - the reason being the Japanese consumers are back and consumption is growing at its fastest rate seen in 10 years," Mr Hunt said.

With the demand in Japan rising, Japanese industries were now able to afford to raise prices a little in the export markets - the first time since 1996.

This meant good news for the rest of the world. For a change, the other industrial countries in Europe did not have to cut prices to compete with Japan. This would in turn lead to economic growth in Europe, leading to more investments. Asia would also benefit from this environment as net exporter, he said.

"And for the first time since the 1980s, we are seeing synchronised growth in world trade," Mr Hunt said. Commodities producers would also be seeing their best markets since 1994.