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Should you invest in Japan? The threats and opportunities

By Connor Freitas

Should you invest in Japan? The Olympics are set to deliver a much-needed boost to the country’s economy, but there are challenges ahead.

For those looking to invest in Japan, there sure are some mixed signals right now. A dramatic contraction of 6.3 per cent in the last three months of 2019 took analysts by surprise – not lease because they had been forecasting a more modest drop of 4 per cent. Then again, investing in Japanese stocks can seem tempting as the Olympics in Tokyo are around the corner. A successful Games often works wonders – giving a boost to tourism and sweetening the bottom lines of local companies thanks to the event’s global appeal.

But is now the time to invest in Japan? What are the opportunities and challenges that lie ahead for the economy, and do the pros outweigh the cons? Here, we’ll give you a snapshot into the health of the world’s fourth-biggest economy.

Japan fact file

In November 2019, the Organisation for Economic Co-operation and Development shared data that suggests it is a bad time to invest in Japan. At the time of its report, government debt stood at a whopping 224 per cent of gross domestic product – a level that the OECD described as a “serious risk”.

Although Japan is attempting to tackle this, some of the measures it is bringing into force look like they’re hurting the economy in the short term. At 8 per cent, the Asian powerhouse had one of the lowest consumption taxes in the world (also known as sales tax or VAT). This may be great for keeping the cost of living low, but it is bad news for the government’s coffers. On 1 October, Japan’s consumption tax rate rose to 10 per cent for most purchases – all in the hope of bringing in much-needed revenues. Unfortunately, this precipitated a slowdown in consumer spending.

Before we carry on, it’s worth bringing this tax rate into context. The likes of Norway, Denmark and Sweden have a sales tax of 25 per cent – two-and-a-half times more than Japan – and their economies are in a much healthier position. It’s fair to say that most Japanese companies to invest in will be exceedingly nervous at the OECD’s calls to continue enforcing gradual increases to the consumption tax in the medium to long term.

We haven’t even discussed Japan’s shrinking, ageing population yet. The country has the highest average age on the planet, as the typical resident is 46 years old. You may be thinking… so what? But here’s the kicker: the OECD says the working-age population is rapidly declining – exacerbating labour shortages. The organisation is calling to “remove obstacles to employing” pensioners over the age of 65 to avoid a squeeze in sectors struggling to attract an adequate workforce. There’s also a big divide between populations in rural and urban areas, creating the very real risk of so-called “ghost towns” where no one lives as the young flock to cities.

Is there much foreign interest to invest in Japan?

Finding out there is foreign cash flowing into the country could provide compelling reasons to invest in Japan. There is conflicting data on this. Japan’s government claims there has been a steady rise since 2011, with inward foreign direct investment (FDI) apparently reaching a peak in 2017. Figures from Santander Trade paint a different picture. Its report says: “FDI flows to Japan remain low compared to most other developed nations across the world. Furthermore, inflows are relatively unstable, with FDI reaching $9.9bn in 2018, down from $17.75bn in 2016 and $10.4bn in 2017.”

Despite the gloomy and contradictory figures, the Santander report does offer a glimmer of hope for those who want to invest in the Japanese stock market. Its analysts point to how Japan is now the 29th best country in the world to do business in – a substantial increase from the 39th position it held in 2019. Noting how the nation leads the charge with advanced technology and research and development, experts at the bank add: “Japan is actively opening its doors to foreign business, as it's aiming to create the best possible environment for overseas investors, backed by Prime Minister Shinzo Abe’s pro-global business policy known as Abenomics.”

How to invest in Japan stock market

Before we delve into the finer points of what to invest in Japan, it’s worth looking at how the Nikkei 225 is performing, which is often tipped as the country’s equivalent to the Dow. Towards the end of August, the index stood at about 20,260. Just three months later, at the end of December, it had soared to 23,650 – a rise of more than 16 per cent. As 2020 began, analysts had been upbeat that the Nikkei 225 could hit 25,000 over the course of the year.

Unfortunately, all of these predictions were being made as the coronavirus began to gain traction in the Chinese city of Wuhan. At the time of writing, the Nikkei 225 has fallen below 22,000 following several days of bruising sell-offs. Technically, Japan has only had about 190 confirmed cases of COVID-19, the disease caused by the coronavirus, since the outbreak began. But this doesn’t take into account what happened aboard the Diamond Princess. The cruise ship was moored off the coast of Yokohama for a two-week quarantine after a case of COVID-19 was confirmed on board. About 700 passengers and crew ended up getting the disease as a result. Japan has had less than 0.25 per cent of all confirmed cases of the coronavirus so far – as the majority were in mainland China – but there are fears this could grow.

The reasons behind the sell-offs are easy to see. Japan may not end up getting too many cases of coronavirus, but it’ll still be affected by the aftermath. Travel across Asia has already been dramatically curtailed because of the coronavirus – and this is bad news for Japan give how one in four visitors came from China, mostly in tour groups. Places like Kyoto may not be on lockdown, but the quiet streets sure make it seem that way.

Shinzo Abe’s government is having to contend with all of this on top of a bruising trade war between Japan and South Korea. Tokyo is restricting exports of chemicals that are crucial for manufacturing semiconductors, one of Seoul’s biggest industries, and has removed the country from a whitelist of trusted trade partners. South Korea is hitting back by boycotting Japanese products and refusing to visit.

This summer’s Olympics and Paralympics could provide a compelling opportunity to invest in Japan. Some forecasters have suggested that there could be an economic upside worth $29bn – with TV manufacturers and fitness-focused companies among those set to benefit. Internationally renowned names such as Toyota, Sony, SoftBank and Mitsubishi are listed in Japan – and according to MSCI, when it comes to company earnings, Japanese stocks are up to 33 per cent cheaper than the average seen on other global markets.

Despite the coronavirus outbreak, Japan is pushing ahead with its plans to host the Games. That’s despite the International Olympic Committee suggesting they could be cancelled if the epidemic worsens further. We’re now less than five months away from the opening ceremony, and Tokyo will be hoping that global panic begins to subside sooner rather than later.

FURTHER READING: Is 2020 the year to invest in Vietnam?

FURTHER READING: Consumer discretionary: sector predictions for 2020

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