THINGS can’t get any worse for Japan, it seems. That at least is the view held by the Bank of Japan, which upgraded its assessment of the economy for the first time in three years, despite a record economic contraction in the first quarter of 2009. GDP data released last Thursday showed that the Japanese economy shrank by 4 per cent on a quarterly basis, or an annualised 15.2 per cent. But the country’s central bank said that the expected revival in global demand could mean that the last quarter would be the worst of the crisis.
Export-dependent Japan has suffered from the drop off in global demand since the start of the recession. In the first three months of 2009 exports plummeted 26 per cent compared to the previous quarter. Staff have been laid off and companies have put any expansion plans on hold.
Talk of green shoots in the US and Europe as well as a global equity market rally has provided hope that there will be a recovery this year and this will benefit Japanese companies whose revenues are reliant on overseas demand. Declines in exports have appeared to level out and industrial output rose 1.6 per cent month-on-month in March, the first gain in six months.
Based on this evidence, spread betters looking at the Japanese Nikkei 225 stock index, which is open during the UK night time – might be tempted to go long on the index. GFT offers a spread of five during Tokyo opening hours (1.05- 7am UK time) and 10 outside those hours. A margin of 1 per cent is required.
Spread betters need to either be awake during trading hours as this is when Asian newsflow is at its highest, or set limit orders and stops appropriately.
The Nikkei is currently trading around the 9,230 mark and although it has risen since its multi-year lows back in February, there could be potential for further upside, should demand for Japanese goods pick up, and the yen continues to weaken, which would benefit exporters.
However, while talk of green shoots, a substantial fiscal stimulus and a replenishing of inventories ought to be a shot in the arm for Japan and its companies, not everyone is so convinced by the Bank of Japan’s upbeat tone.
Lindsay Coburn at ING says that there is no certainty that inventory rundown will stop dragging growth and there are worrying implications for the near future. “We think a further decline in inventories in the second quarter can be expected, perhaps dragging quarterly growth by almost a full percentage point,” she says.
A larger than expected decline of 10.4 per cent quarter-on-quarter in business investment also means that Japanese companies are not pursuing expansion plans and their forecasts remain gloomy.
Plenty of companies in the Nikkei 225 are anticipating a grim 2009 and are desperately trying to cut costs to halt mounting losses.
Sony, for example, said it will have to halve the number of its suppliers in the next two years and aims to cut procurement costs by 20 per cent this year. And earlier this month the world’s top carmaker Toyota forecast an annual loss of $8.6bn and said it would sell 1m fewer vehicles in 2009.
Japanese investors need to see evidence for a V-shaped recovery if they are going to buy stocks, but company forecasts are not providing this.
Coburn concludes, contrary to the view held by the Bank of Japan, that the trough in the economic cycle appears to lie ahead of us, rather than behind in the first quarter.
She says: “We do not deny signs of stabilisation in monthly data releases on industrial production, exports and machinery orders, but real GDP stands an even chance of declining in the second quarter as rising. Investors positioning for a growth rebound in Japanese equities should note this.”
Night owl spread betters might therefore look to go short on the volatile Nikkei 225 in the expectation that poor growth prospects and continued falls in inventories will continue to drag down growth and the main stock index.