A Bleak Outlook on Japan

Robert Hsu, June 26, 2009

Along with the World Bank's depressing projection for the global economy this week, the economic picture is still pretty bleak for Japan. The government lender is predicting that Japan's economy will contract 6.8% in 2009. As a result, Japan's Nikkei index plunged nearly 3% in trading on Tuesday.

What's interesting is that the index then recouped these losses throughout the week, due to encouraging news about Japan's economy, renewed optimism that earnings are improving, and improved investor confidence.

First, earlier this week it was noted that the country experienced a jump in industrial production in April -- it's fastest pace in 56 years. In addition, Japan's GDP is expected to grow 1.5% this quarter, a stark comparison to the whopping 14.2% decline from the first quarter. Much of the boost in production and the economy is being spurred on from Chinese demand from Japan's heavy equipment and vehicles, as well as the country's own stimulus plans lifting consumer confidence.

Then later in the week, two of Japan's largest companies -- Bridgestone and Nippon Electric -- provided encouraging outlooks. Bridgestone trimmed down its expected loss for the first half of 2009, and Nippon lifted its profit target.

Despite these positive improvements in the Japanese economy this quarter, I have to agree with the World Bank. Japan is going to continue suffer greatly this year from recession, and it will likely carry over until next year.

In April, the country's unemployment numbers continued to rise -- it's now at 5%, a five-year high. In most cases, there are two people competing for every job opportunity. And the threat of deflation is rising. Consumer prices in Japan, excluding fresh food, declined 1.1% in May, a record pace.

Because of the dismal outlook for Japan's economy through the end of the year and into 2010, I remain convinced that we continue to avoid investments there. Instead, China offers more profitable opportunities with its rapidly recovering economy -- on track to post 8% growth during the second quarter -- and its outperforming stock market.

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