In the last quarter of 2016, Japan’s economy expanded at a faster pace than was earlier estimated. The world’s third-largest economy registered expansion for the fourth straight quarter following a rise in capital expenditure and stronger exports. Rising business investment pushed up the country’s capex, while weaker yen benefited exporters.
Currently, there is a need to look beyond the success of the domestic market and diversify abroad into other markets, particularly Japan. An expanding economy, soaring capital spending and improved export conditions mean that adding stocks from the country to your portfolio makes for a great investment option.
Q4 GDP Register 4-Straight Quarter Expansion
After contracting in the last quarter of 2015, Japan’s economy expanded in all four quarters last year. According to the country’s Cabinet Office, Japan’s real GDP increased 0.3% in the fourth quarter, higher than February’s preliminary reading of a rise of 0.2%. Moreover, the third largest economy also expanded 1% last year after registering growth of 1.2% in 2015.
The adoption of aggressive monetary policy by the Bank of Japan, aimed at boosting investment, had a positive impact on the broader markets. Additionally, Prime Minister Shinzo Abe’s three-stage economic plan has stimulated growth in the economy. A better growth pace will lead to a subsequent increase in productivity, thus ensuring future expansion.
Capex Posts Best Rise Since 2014
Capital expenditure, one of the key components of GDP, increased by 2% in the last quarter of 2016, significantly higher than the preliminary reading of a rise of 0.9%. Capex increased at the fastest pace since the first quarter of 2014. This was possibly one of the key drivers of Japan’s economic growth last quarter.
As per a Cabinet Office official, higher levels of investment from companies involved in construction, real estate, electronics and food processing steered the capex into gains. Moreover, several economists believe capital expenditure will increase even further as companies move to invest in new and updated equipment in order to cope with a shrinking workforce as a result of the rapidly ageing population.
Fed Rate Hike Likely to Impact Yen
Last quarter, net exports increased 0.2% and are expected to maintain this pace of growth on the back of a weaker yen. In its two-day policy meeting starting March 15, the Fed is expected to raise key interest rates, on the back of stronger inflation and better economic growth in the U.S. Fed rate hikes will result in a further decline of the already weakened yen, which would benefit Japan’s manufacturers and exporters. According to CME FedWatch Tool, the possibility of a Fed rate hike is more than 84%.
Additionally, as per former Bank of Japan (BOJ) board member Sayuri Shirai, the BOJ is expected to keep rates "constant" following steady growth pace in the economy. Shirai said the BOJ projects “continuous nominal wage growth, together with higher expectations on wage growth. Corporate sector profits are very high historically, but the impact on wages is still limited."
The only risk which continues to hover on the horizon for Japan’s stocks is the impact of change in the key economies like the U.S. and Europe which lead to an increase in uncertainty. This is why picking Japan stocks looks like a smart option at this point. However, picking winning stocks may prove difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows one to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. Moreover, these stocks also carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Nippon Telegraph and Telephone Corporation provides a variety of telecommunications services, including telephone, telegraph, data communication and other services in Japan and internationally. Nippon Telegraph and Telephone has a VGM Score of B. Its earnings estimate for the current year has improved by 2.4% over the last 60 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Capcom Co., Ltd. (CCOEY - Free Report) plans, develops, manufactures, sells and distributes consumer video game worldwide. Its operating segment consists of Digital Contents, Arcade Operations, Amusement Equipment and Other Businesses segments. CAPCOM CO., LTD. is headquartered in Osaka, Japan. Capcom has a VGM Score of B. Its earnings estimate for the current year has improved by 13.8% over the last 60 days. The stock has a Zacks Rank #2.
Alps Electric Co., Ltd. (APELY - Free Report) is a Japan-based company mainly engaged in the manufacture and sale of electronic components and audio equipment globally. The company operates in three business segments. Alps Electric has a VGM Score of A. Its earnings estimate for the current year has improved by 12.3% over the last 60 days. The stock has a Zacks Rank #1.
NTT DOCOMO, Inc. is Japan's leading mobile communications company. The company provides a wide variety of leading-edge mobile multimedia services. NTT DOCOMO has a VGM Score of A. Its earnings estimate for the current year has improved by 0.6% over the last 60 days. The stock has a Zacks Rank #2.
Seiko Epson Corporation (SEKEY - Free Report) is engaged in the development, manufacturing and marketing of information-related equipment, electronic devices, precision products and other products. The company operates both in Japan and internationally. Seiko Epson has a VGM Score of A. Its earnings estimate for the current year has improved by 3% over the last 60 days. The stock has a Zacks Rank #2.
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