Sentiment In Japan Improves
Business Sentiment has improved on the back of strong economic growth.
by Mah Ching Cheng
Growth in Japan is going strong as it announced an adjusted annualised quarterly growth of 6.4% for the fourth quarter in 2003. This means that Japan's economy grew 3.4% year-on-year in the fourth quarter of 2003. Along with the economy, business sentiment is improving as business spending rose 6.3% in the fourth quarter. This accounted for 1 percentage point of the quarterly economic growth of 1.7%. As we can see from Chart 1, there is a clear trend of improving economic growth from March 2002. Chart 1: Japan's Economic Growth Source: Economic & Social Research Institution, Japan The increase in economic activity came on the back of rising exports, higher capital spending by Japanese companies and an increase in consumer spending. Views from economists are that exports will continue to lead growth in the coming months as demand for digital cameras and other electronics equipment increases. For example, rising overseas demand may spur Seiko, Epson, Sharp Corp. and other manufacturers to increase production. Another indicator of growth is the Japan's index of leading economic indicators. It was at 55.6% in February 2004 and this is the fifth consecutive month that this indicator was above 50%. This index measures job offers, consumer confidence and other indicators of future activity. A reading of above 50% signals an expansion in 3 to 6 months. Rising exports and industrial production will be able to improve both business and consumer sentiment in the year ahead. Household spending, for example, rose 3.4% year-on-year in January. Exports are expected to continue to improve as the demand from China and the US is still going strong. Chart 2: Japan's Leading Economic Indicators Source: Economic & Social Research Institution, Japan Japan's industrial production rose 5% year-on-year in January 2004 as Japanese manufacturers increased production at the fastest pace in 4 months. Growth in industrial production is likely to continue for the following months as an improving domestic and export demand spur companies to produce more. Chart 3: Japan's Industrial Production Source: Ministry of Economy, Trade & Industry, Japan In conclusion, the Japanese economy surprised the market with an adjusted annualised growth of 6.4% in the fourth quarter 2003. Economic recovery in Japan is on the back of strong export growth and improving consumer sentiment. Japan's leading index was at 55.6% in February. This is the fifth consecutive month that this index was above the 50% mark. Industrial production rose 5% year-on-year in January, which shows that companies are more optimistic and are producing more to meet domestic and export demand. With these positive factors, we believe that Japan's economic recovery is likely to continue and there is increasing optimism that growth is sustainable in the future. Recently, the yen has been appreciating against the US dollar. As at end February, the yen had appreciated 7% against the US dollar in the past 6 months. There are both pros and cons to this. This may actually reduce export demand because Japanese exports become more expensive. However, exports grew at a healthy rate of 11.3% year-on-year in January. This shows that the rising yen still did not have such a strong impact on export growth. As for investors who have investments in Japan, a rising yen mean a potential upside in the value of their investments in local currency terms. For a 3-year horizon, our outlook on the market is neutral. Our recommended funds for Japan are UOB United Japan Growth Fund and AIG Japan Large Cap Equity Fund. Both funds are CPF-Approved.
SENTIMENT IN JAPAN IMPROVES
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