Japan still showing signs of weakness

After a strong start to the year, it didn’t take much to knock the Nikkei off course again and the index dropped 0.85% over the month. This was a worse showing even than Europe, where the FTSE Eurofirst only dipped 0.23% in spite of the fallout from the Greek crisis.By comparison, the FTSE 100 rose 3.2% and the S&P 500 was up 2.85%.

The ongoing problems at Toyota contributed to the weakness of Japan’s stock market – the shares fell from Y2,662 (£354) to Y2,335 as the carmaker’s woes continued – but elsewhere the news was surprisingly good. The economy grew faster than expected in the fourth quarter, rising 1.1% though some of this growth was ‘inherited’ from the previous quarter where growth figures were revised down from 1.2% to 0.3%. Exports continued their strength, in spite of Toyota’s problems, and industrial output rose for the 11th consecutive month.

More importantly, domestic demand began to emerge. While it would be premature to suggest the Japanese consumer is going to change the habits of the past 20 years and start spending, there were undoubtedly signs of life in retail spending figures. They rose for the first time in 17 months, up 2.6% year-on-year for January. Some analysts took this as a sign that government family-friendly policies, which have focused on putting money back in the pockets of householders, may be paying off.


However, deflation continues to act as a drag on spending. The GDP deflator – the level of prices for new, domestically produced goods and services – saw a 3% annual fall and consumer prices fell for the 11th month running. The government made tentative steps towards dealing with the problem, setting the Bank of Japan an inflation target for the first time – it was only 1%, but it was at least a statement of intent. The lack of an inflation target has been a long-standing criticism of the Japanese government’s policy and its introduction marks a break with the previous administration.


In spite of the relative weakness of the Nikkei, Japan funds are still ahead of the pack for the year to date, with the average fund in the IMA Japan sector delivering 7.37% while the average Japanese Smaller Companies fund is up 7.33%. The next best performer is the North American Smaller Companies sector, which has delivered 4.55% in comparison. Japan fund managers remain relatively optimistic, arguing valuations of Japanese companies are low relative to history and to their global peers.