Wake up Japan! Your Neighbor’s a Real Threat

By George Leong for Investment Contrarians | Sep 18, 2012

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Japan’s economy has been in a comatose state for over two decades, and the country continues to face hurdles that threaten the next several years. And just when Japan’s gross domestic profit (GDP) growth was showing some life, the eurozone mess surfaced and wreaked havoc.

From 1981 to 2010, Japan’s average GDP growth was 2.2% with a high of 9.4% in March 1988; but this seems to now be in the distant past, based on the soft projections going forward.

In the second quarter, Japan’s GDP growth was a meager 0.3%, well below the 0.6% estimate and the promising 1.3% in the first quarter. Over the past decade, Japan’s GDP growth expanded at a snail’s-pace average of 0.2% quarterly.

In the following chart, take a look at the comparative GDP growth over the past five years between China and Japan; notice the significant difference in GDP growth between the two countries.

Chart copyright Lombardi Publishing, 2012; data source: www.data.worldbank.org

Japan is blaming its stagnant GDP growth on the economic stalling in Europe, along with the high level of the yen and its impact on exports.

And just like the U.S., Japan relies on domestic private consumption, but that accounts for about 60% of Japan’s economy versus about two-thirds for the U.S.

Japan was the second largest economy in the world, before it was surpassed by China in 2010. The country has an unemployment rate of over four percent—something that was not a norm in the country’s boom days. In June, the unemployment rate was 4.3%, which is much better than the 8.3% in the U.S. but well below Japan’s long-term average of 2.7% from 1953 to 2012.

The higher value of the yen also makes it tough for Japanese exporters, and it is preventing an export-led recovery for Japan’s economy.

By comparison, China is strong since its yuan is undervalued, which aids the country’s exports and builds on its massive trade surplus.

It will continue to be difficult to make money in Japan, given the muted GDP growth.

And with the risk in China, you can take a look at the four little tigers comprised of Hong Kong, Singapore, South Korea, and Taiwan.

But you should not give up on the Japanese economy; there are some good buying opportunities.

I like the major Japanese stocks, including Mitsubishi UFJ Financial Group, Inc. (NYSE/MTU) and Sumitomo Mitsui Financial Group (NYSE/SMFG), which are interesting bank stocks.

Billionaire and investment guru Warren Buffett said the weakness in Japanese stocks provides a buying opportunity. My view is that you probably want to stick with the blue chips.

The key to Japan’s economic renewal will be government spending, including new buildings, roads, and various infrastructures. This means demand for concrete, steel, and other building materials. An infrastructure buildup also means workers will need to be hired.

Other than the banks, you want to look at infrastructure stocks, not only those in Japan, but also global companies operating in the U.S., such as Jacobs Engineering Group Inc. (NYSE/JEC) and Fluor Corporation (NYSE/FLR).

You also want to look at companies that provide the building materials, such as concrete or steel.

There may be a light at the end of the tunnel, but for Japan’s economy and GDP growth, it is quite dim at this time, as it has been for over 20 years. Stick with China.

Tags: bank stocks, blue chips, GDP growth, unemployment rate