The third largest economy in the world has returned to recession after posting a second consecutive quarter of economic contraction in the first three months of the year.
Gross Domestic Product (GDP) shrank by 0.9% between January and March 2011 in Japan, leading to an annualised contraction of 3.9%.
This return to recession was widely expected after Japan suffered the devastating earthquake, tsunami and nuclear crisis in March.
However, the rate of contraction was much larger than expected as many economists had forecast a fall in GDP of only 2% over the past year.
The big questions now are for how long the Japanese economy will remain weak and to what extent investors in Japanese companies will suffer.
The IMA Japan sector has delivered an average return of -7.51% over the past twelve months, returning -15.00% over the past three months.
Whilst Japan is a reasonably small exposure within the investment models we recommend to clients, it is an important economy on the global stage and particularly in the region, driving trading activities with other countries.
At the start of the second quarter, our Investment Committee took the decision to maintain our underweight position in Japan. Some fund managers and investors were using the price falls prompted by events in March as a ‘buying opportunity’, but after careful consideration we decided the outlook for Japan remained too uncertain.
Whilst the Japanese economy is likely to remain weak for some time, it should have the strength to recover over the medium term.
Unlike many Western economies, Japan benefits from a high rate of private consumption, which accounts for nearly 60% of their economy.
The Japanese people tend to have minimal debts and healthy savings, despite over a decade of zero interest rates. This cultural difference could be enough to generate a consumer-led recovery to pull Japan out of recession.
Combined with money pumped into the reconstruction effort and the Bank of Japan maintaining an ultra-loose approach to monetary policy, the prospects for Japan look reasonable over the medium to longer term.
Photo credit: Flickr/OiMax
