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Japan's Economy Rebounds in Q2: 5 Great Picks

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In the second quarter, Japan’s economy staged a strong rebound. The economic expansion came on the back of an increase in wages and consequently, consumer expenditure. Earnings in turn were fueled by robust half-yearly bonus payouts. The latest spurt of growth comes after a contraction, which snapped Japan’s largest expansion in nearly 30 years.

Some economists think that growth has remained below most expectations. However, the majority believe that the current trend of solid growth should continue unless trade tensions with the United States increase. Investing in stocks from Japan seems like a prudent option at this point.

Private Consumption Powers Q2 Growth Spurt

The third-largest economy in the world expanded at an annualized rate of 1.9% in the April-June quarter, exceeding most estimates. The rebound in growth comes after a revised 0.9% annualized contraction in the first quarter. This contraction had served to snap the longest stretch of growth in 28 years.

The largest contributor to growth during the second quarter was private consumption, which increased by 0.7%. This component accounted for around 60% of total GDP.  The rebound in private consumption comes on the heels of a 0.2% decline in the first quarter, after temporary pressure such as heavy snow and a spike in fresh-food prices faded.

In the second quarter, summer bonuses jumped significantly following spectacular corporate earnings. The 2.1% increase in cash earnings was the highest recorded since 1997. Nominal compensation of employees hit a record level during this period, registering a yearly increase of 4.3%.

Can Trade Tensions Disrupt Japan’s Growth Trajectory?

Going forward, a steady increase in wages is likely to support private consumption. Incidentally, capital expenditure was the second-largest contributor to growth during this period, advancing by 1.3%. However, external demand, which is the difference between exports and imports, declined by 0.1%.

Market watchers feel that a slowdown in exports could impede economic growth going forward. This is particularly true considering the differences in opinion between Japan and the United States on global trade.

In an attempt to lower its trade deficit, the United States has urged Japan to ink a bilateral trade agreement. However, Japan has reiterated on more than one occasion that it prefers bilateral trade agreements, which could lead to further conflict.

Currently, the United States is mulling over a 25% tariff on autos and auto parts. But the agreement reached with the EU indicates that the United States may ultimately refrain from imposing tariffs.

Our Choices

The rebound in growth in the second quarter indicates that the Japanese economy is in fine fettle. A steady increase in wage growth is likely to support consumer spending, the largest component of GDP, going forward. The likelihood of trade tensions impacting growth also seems miniscule at this point.

Investing in Japan’s stocks looks like a smart option at this time. However, picking winning stocks may be 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 you 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. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Nikon Corporation (NINOY - Free Report) is engaged in the manufacture and sale of a wide spectrum of businesses centered around imaging products, precision equipment, and instruments.

Nikon has a VGM Score of B. The company has expected earnings growth of 44.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 13.4% over the last 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Internet Initiative Japan Inc. (IIJI - Free Report) offers a comprehensive range of Internet access services and related services to customers, including corporations and other service providers, in Japan.

Internet Initiative Japan has a Zacks Rank #2 (Buy) and VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 5% over the last 60 days.

ORIX Corporation (IX - Free Report) is a diversified financial services institution with diverse operations in both corporate and retail finance.

ORIX carries a Zacks Rank #2 and has a VGM Score of A. The company has expected earnings growth of 9.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.8% over the last 30 days.

Hitachi, Ltd. (HTHIY - Free Report) is one of the world's leading global electronics companies.

Hitachi carries a Zacks Rank #2 and has a VGM Score of A. The company has expected earnings growth of 6.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 30 days.

Honda Motor Co., Ltd. (HMC - Free Report) is a leading manufacturer of automobiles and the largest producer of motorcycles in the world.

Honda carries a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 2.6% over the last 30 days.

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