Japanese companies buck global trend

Positive economic data from the US provided a much-needed boost for investor sentiment in Japan during November. The Nikkei 225 Stock Average index bucked the global trend by rising during the month while most major equity markets registered declines.

The Nikkei 225 rose by 8% over November as a whole, also reaching its highest closing point since June during the month. The yen softened during November, boosting investor sentiment towards Japanese exporters although, according to recent data released by the Investment Management Association, Japanese equity funds experienced net outflows during October.

Japan’s economy expanded more quickly than expected during the third quarter, rising by 3.9% year on year. However, the strong yen and its effects on export activity are likely to have an adverse effect on growth during the fourth quarter. Machinery orders declined by 9.2% during September compared with August. A survey of Japanese machinery manufacturers suggested they expect total machinery orders to fall by 2% during the fourth quarter of 2010 compared with the third quarter, while orders from the private sector are expected to fall by 9.8%.

In a speech delivered during November, the governor of the Bank of Japan (BoJ) warned that the pace of recovery is likely to remain slow “for the time being”, held back by sluggish economic growth elsewhere in the world and the strength of the yen. Nevertheless, he expects to see “a moderate recovery” during fiscal 2011 as export growth improves and corporate and household spending picks up. According to minutes from the BoJ’s October meeting, board members suggested purchases of real estate investment trusts and exchange-traded funds might boost investor sentiment and hence provide a catalyst for transactions.

The Organisation for Economic Growth & Cooperation (OECD) expects Japan’s economy to expand by 3.7% during 2010, before decelerating sharply to register growth of just 1.7% in 2011. The OECD gave a relatively downbeat assessment of Japan’s economic prospects, believing the current environment of price deflation and high unemployment is likely to persist.
Consumer confidence declined to its lowest level for seven months during October, and retail sales fell for the first time this year, dropping by 0.2% year on year. Deflation remains a problem, and prices fell by 0.6% year on year during October. Nevertheless, the Governor of the BoJ expects annualised growth in inflation to enter positive territory during fiscal 2011 as the balance of supply and demand improves.