Japan's gross domestic product (GDP) report from last week, beat expectations as it was up 2.1 percent quarter on quarter and annualised.
This figure was obtained by a strong boost from public demand for residential housing which reduced the strain on GDP.
Although consumer spending is still basically flat, household sector confidence and willingness to take risks are actually on the rise in Japan. After the 10.3 percent gush in the previous quarter, the structural upcycle in domestic capital expenditure is still intact.
Global and Domestic
All said, the GDP report confirms a Japanese macro environment of relatively strong resilience.
While the tradeable goods sector has been pulled into recession by the downturn in China and declining U.S. passenger car sales, Japan's domestic service sector is actually heading in a positive direction.
Earnings season showed that published corporate earnings are reflecting the situation of good domestic news but bad global news. The manufacturing sector profits dropped 4.3 percent in 2018, while profits rose 10.2 percent for non-manufacturers (excluding financials).
Total profits for listed companies dropped 0.6 percent, pulled down by the more dominant weight of industrials.
Key macro questions
1) When will the industrial down-cycle bottom?
2) Will the positive decoupling by domestic services continue, particularly in light of the consumption tax hike due October of this year?
It seems that prospects for a continued uptrend in the domestic sectors are very good. The demand boost from the new Imperial Era holiday is very much a positive factor, as well as the positive momentum in small and medium-sized companies' investment spending and capital stock upgrades.
From a Japanese perspective, the biggest negative of the U.S.-China trade war is the fact that corporate leaders and entrepreneurs across Asia continue to postpone capital spending and capacity expansion plans. This will change only if a trustworthy new trade regime comes into sight. When it does, Japan will be a significant beneficiary, given that as much as half of the machinery and equipment that goes into an Asian factory is made by a Japanese company.
Fiscal Stimulus and Elections
Japan’s Prime Minister deserves to be congratulated for the perfect tactical boost delivered against the cyclical downturn in the industrial sector. Any sign of further deterioration in the industrial sector or evidence of service sector activity momentum slowing is expected to bring an added fiscal boost. However, a pushback in the consumption tax hike is unlikely.
Meanwhile, speculation about Prime Minister Abe calling a "double election" is rising. The primary force behind this election is not economic policy but domestically powered politics. Before long, the Prime Minister will have to try to extend and solidify his grip on power.
This article was issued by Maria Fenech, investment management support officer at Calamatta Cuschieri. For more information visit, https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.