All signs are pointing to a second straight quarter of negative economic growth, according to Kimura. He said: “It’s tempting to attribute blame to China’s slowdown in growth, but its impact on Japan’s growth prospects is limited in the long run.” The reason for this, he explained, is that the net trade impact is only around 12%.
However Kimura added that, from a stock-picking perspective, “investors would be wise to avoid mining, machinery, ship building, iron and steel industries which are underperforming in the current market environment.”
Tourism and Olympics related construction will likely continue as the key growth drivers for Japan next year, according to the economist. He said: “Record numbers of tourists are visiting Japan attracted by the price, with hotels and international flights now reaching capacity. The construction industry is also booming, bolstered by infrastructure projects for the 2020 Olympic Games in Tokyo.”
These positives are being offset by low consumption levels however. “The gap between prices and slow wage growth continues to widen, taking away the purchasing power from households in Japan. We’re now facing an economic bottleneck,” said Kimura.
Japan’s economy minister Akira Amari has said the country should consider an extra fiscal stimulus this autumn. “The biggest problem of the Japanese economy is the birth rate, so we could look at measures giving people the security to have a second or third child,” he said.
It remains to be seen whether the Bank of Japan will introduce more monetary stimulus to fuel the economy. “With the Nikkei-225 at its current level we don’t see any immediate need for the central bank to expand quantitative easing,” said Kimura. “But it will depend largely on both the equity and foreign exchange markets whether governor Kuroda’s hand is forced to act sooner rather than later.”