Profits And Growth – Is Japan On The Right Track With Abenomics

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With the yen plunging in value by 20% since November, some economic experts are questioning whether Japan’s economy is going turning around as predicted.

Many investment analysts believe that Japanese equities are still bargains and will bring higher yields in the months to come.

One such analyst is Shogo Maeda, head of Japanese equities at investment bank Schroders, and he reckons the falling value of the yen is bringing strong profits for the country’s companies.

He said: “Most of Japan’s companies have now announced their 2012 results and not only have share prices increased but so have their bottom lines.

“On average, pre-tax profits for Japanese companies last year were up by 9% and after-tax profits increased by 23%, year-on-year.”

Deflation doldrums

Japan has faced years of deflation and new Prime Minister Shinzo Abe promised to bring inflation to breathe life into the economy.

His financial tactics were dubbed ‘Abenomics’ and rely on the Bank of Japan pumping billions of yen in investment into the economy – mainly through buying government bonds.

This has led to a stock market boom and boosted the country’s GDP output by 3.5% in the first quarter of 2013 – higher than the expected 2.7%.

The falling yen has made Japan’s exports much cheaper, which has annoyed her Asia Pacific neighbours, and the US, but not everything is going to plan.

The stock market is still volatile – there has been a 5% drop in one day for the Nikkei 225 Index recently, with the broader TOPIX losing 3.8% at the same time, which comes on top of a 6.9% drop in one day in May.

Some of the stock movement is down to profit-taking, but many analysts are growing impatient with the delay of the announcement of the prime minister’s planned structural economic changes.

Investors encouraged

However, Shogo Maeda says that equities are still a good investment, though he warns that investors should keep an eye on the exchange rates for yen.

He says that exporters are expecting the yen to fall further, which should increase their operating profits by up to 2%.

Mr Maeda adds: “Investors should be aware there is encouraging room for improvement in the earnings for large trading companies, many of which have been lagging behind the market because of their exposure to resources and commodities.

“These companies are trading currently at seven times their current year’s earnings while the TOPIX trades at around 16 times.”

He warned too that a weak global economic recovery, particularly in America, would also hit earnings for Japanese firms.

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