Will The Sun Rise Again In The Land Of The Rising Sun?

Just when you thought that it was safe to pronounce the dawning of a new era for the Land of the Rising Sun, Japan unexpectedly slips back into recession.

But despite the obvious disappointment for both Japan and the rest of us, the country is still ranked the fourth-largest economy in the world. It is about half the size of China, which in turn trails the Eurozone and the United States in terms of economic might.

Failure is not an option

The sheer size of Japan’s economy highlights why it must grow again, if the rest of the world is to have any chance of sustained recovery. Global expansion, which could be around 3.8% next year, needs the major growth engines of both the East and the West to function smoothly.

Simply relying on the US to do all the heavy lifting will not be good enough.

In that regard, Japan is doing all that it can to drive domestic economic expansion. Under Prime Minister Shinzo Abe the country has embarked on an audacious strategy, which has been dubbed Abenomics.

1, 2 and then 3

Abe’s three-pronged plan comprises of pumping money into the Japanese economy, increased government spending and structural reforms that include increased competition and reduced protectionism.

However, there are signs that political fatigue might be setting. That has prompted the Prime Minister to call a snap election, which could provide him with a vital mandate.

The election could also give him another four years to allow Quantitative Easing to work. Monetary easing will take time. In the case of the US, it took almost seven years before tangible results were seen.

Leap of faith

That said, the stock market has not shown signs of restraint Since the end of 2012, which was when Abenomics was first touted, the stock market has jumped from 9,527 points to 17,357 points.

The near doubling of the benchmark index was not entirely unexpected, though. After all, an increase in the flow of money can be a powerful driver for stock markets.

Investors looking to capitalise on the Japanese stock market recovery could consider a low-cost index tracker such as the Lyxor Japan (Topix) Fund (SGX: CW4). The ETF aims to track the performance of the Topix Gross Return Index. Some of its main holdings include Toyota Motor Corp, Honda Motor and Hitachi.

Many of these companies could benefit from Quantitative Easing, given that one of the (un)intended consequences of the unconventional monetary policy is to depress the value of the local currency. A lower yen could help many exporting Japanese companies become more competitive, overnight.

Home alone

Investors looking to stay closer to home could examine Singapore companies that have exposures to the Japanese market.

Saizen REIT (SGX: DZ8U) invests primarily in residential properties in Japan. So virtually all of its revenues come from there. Its target tenants are small families who enjoy living close to business districts and transport hubs. The S$253m Real Estate Investment Trust is currently valued at a small discount – about 20% – to its Net Asset Value. It also boasts a dividend yield of just over 7%.

Unlike Saizen, Mapletree Logistic Trust (SGX: M44U) only generates around a fifth of its profits from Japan. The company’s main focus is warehouses and distribution centres that stretches from Japan in the north though to China and Vietnam and down to Singapore in the south. Mapletree Logistics Trust is valued at around S$2.9b and yields 6.5%.

No guarantees

Japan’s economic recovery is far from certain. If anything, it hinges on whether Prime Minster Abe’s can convince Japanese voters to give him another four years to turn around the country’s flagging fortune.

If he can successfully win the snap election, the Sun could once again rise in the Land of the Rising Sun. That could not only be good for Japanese companies but also for Singapore companies that are exposed to the Japanese market.

A version of this article first appeared in the Independent on Sunday.

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