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Corporate Capex Leads Recovery in Japan's Economy: 4 Picks

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The land of the rising sun has always been an economic powerhouse. However, the recent economic slowdown had put Japan in a tight spot. Further, trade war perils weighed on Japan’s exports, thereby retarding growth. However, a recovery seems to be occurring at this point.

Per the latest reports, corporate capital expenditure in Japan rose an impressive 12.8% in the second quarter. Such developments raised hopes of an economic recovery led by increased business spending.

Also, Japan’s Services Purchasing Managers Index (PMI) surged to a four-month high in August. Under such circumstances, betting on stocks from the country seems prudent.

Japan’s Corporate Capex Highest in 12 Years

Per the latest report by Japan’s Ministry of Finance (MOF) on Aug 27, corporate capital expenditure in the country surged to its highest levels since 2006 in the April-June period. This not only implies that business spending remained robust in the second quarter but also raised hopes of strong GDP growth in Japan in the second quarter, led by its private sector.

Growth in investment was bolstered by increased spending on production of cars and electronic components among other things. A business-led recovery in the Japanese economy seems imminent at this point. Further, this marked the seventh consecutive quarter of annualized growth in capital expenditure.

Moreover, capital expenditure excluding software, gained a seasonally adjusted 6.9% in the second quarter. The metric increased for the fourth quarter on the trot, hitting its best levels since 2011. Meanwhile, a preliminary estimate revealed that Japan’s economy would grow 1.9% in the second quarter on the back of increased household and business spending.

Economists believe that GDP would inch higher after the MOF capex data is used to update the GDP figure for the April-June quarter. Further, Nomura estimates that the country would witness 2.3% growth in the second quarter.

Service and Business Activity Burgeoning in Japan

Per the latest report on Sep 2, the Markit/Nikkei Japan Manufacturing Purchasing Managers’ Index (PMI) surged to a seasonally adjusted level of 52.5 in August on the back of strength in new orders. This also marks the 24th straight month of increase in manufacturing activity in the country and points to robust business activity in Japan.

Meanwhile, service activity hit a four-month high in August. On Sep 3, the Markit/Nikkei Japan Services Purchasing Managers Index (PMI) surged to 51.5 in August from 51.3 in July. Such gains were achieved on the back of higher sales and new store openings across the country.

Also, the composite PMI, including manufacturing as well as services increased to 52.0 in August from 51.8 in July.

4 Hot Choices

A private sector-led recovery in Japan’s economy is expected in the second quarter. Corporate capital expenditure has remined an important aspect of the Japanese economy. The metric rose to its highest settlement in as many as 12 years.

Further, both business and service activities remined robust in the country, boosted by strong domestic demand-supply dynamics. In this context, we have selected four stocks from Japan that are expected to gain from these factors. These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sony Corporation (SNE - Free Report) is the designer, developer and producer of electronic equipment, instruments and devices.

The company is based out of Tokyo and sports a Zacks Rank #1. The expected earnings growth rate for the current year is 25.68%. The Zacks Consensus Estimate for the current year has improved 7.3% over the last 60 days.

Honda Motor Co., Ltd. (HMC - Free Report) is the manufacturer and distributor of motorcycles, automobiles, power products and other related products.

The company is based out of Tokyo and carries a Zacks Rank #2. The Zacks Consensus Estimate for the current year has improved 2.3% over the last 60 days.

ORIX Corporation (IX - Free Report) is the provider of diversified financial services to clients in Japan and the Americas.

The company is based out of Tokyo and carries a Zacks Rank #2. The expected earnings growth rate for the current year is 9.2%. The Zacks Consensus Estimate for the current year has improved 2.8% over the last 60 days.

OBIC Co., Ltd. (OBIIF - Free Report) is a provider of system integration services, system support services, office automation services and package software services. It also sells, leases and develops computers, peripherals, related systems and customized software.

The Zacks Rank #2 company is based out of Tokyo. The expected earnings growth rate for the current year is 8.2%. The Zacks Consensus Estimate for the current year has improved 2.1% over the last 60 days.

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