Tokyo Stock Exchange

There is no doubt the revitalisation is fueled by the increase in Exports reported as part of the National Accounts in early August, as well as improvements in sale figures announced by large Japanese corporations such as Mitsubishi and Toyota. Investors are expected to tune down trading until after the elections on the 30th of August. The DPJ opposition party is expected to win by a landslide.

Given the recent press coverage on the performance of the Tokyo Stock Exchange, it is useful to place it in a historic perspective. Below is a chart of the NIKKEI 225 since the early 1980s. Most notable is the historic record of just under 39,000 points in 1989. It took Japan only six years to quadruple the value of its stock exchange. We now know the share-market was hugely overvalued and did not represent in the least, the true value of the market at the time.

The NIKKEI 225 index from the early 1980s till today

Even with the recession in the 1990s, the NIKKEI 225 hovered between 15,000 and 20,000 points. Only after the dot com crash followed by the 911 attacks in the US did the index dive below 10,000 points.

The message to take away is that although the NIKKEI 225 is taking steps to a recovery, it is effectively still at the level of 1984. The Heisei recession has effectively wiped 25 years of economic growth off the table.

Tokyo's Skyline

In the second quarter of 2009 the Japanese economy grew by 0.9% compared to the previous quarter. This is positive news, and a bigger increase than the 0.3% that France and Germany reported last week. Analysts’ reaction was rather cool and the Tokyo Stock Exchange took a nosedive.

The chart below shows economic growth in Japan, the US, Australia and the Eurozone from 1995 till the end of 2008. 1995 is used as the base year with the graph plotting the percentage increase in GDP for each economic zone. Australia has been growing the strongest of the four with an average annual growth hovering around 4.5%. The 16 countries that are part of the Eurozone posted decent growth averaging 2.5% annually.

After the economic heydays of the 80s, Japan’s economy went into a slowdown from 1991 onwards. This chart clearly shows three times that the economy appeared to have taken off. Each time GDP increases were followed by a significant slowdown.

GDP Growth - Base Year 1995

The first spur was in 1995 and 1996 with 2% of economic growth. In 1997 the Asian crisis broke out, taking Japan into negative growth in 98 and 99. Japan was affected by a decrease in exports and reduced income from overseas operations due to the strong Yen.

In 1999 the Bank of Japan introduced a zero-interest-rate policy effectively making the overnight call rates zero. 2000 was a strong rebound year achieving 2.9% growth, followed by the infamous year 2001 with another dive to stagnating GDP. The economy was back on track from 2003 to 2007 with annual growth figures between 1% and 3%. When the crisis broke out in 2008, Japan was the first economy to be hit hard even though its financial system was largely unaffected by the sub-prime mortgage soupe.

The 0.9% growth Japan achieved in the second quarter is therefore a positive sign and a good indication the worst of the GFC is behind us. Given Japan’s multiple false starts, it is uncertain whether this will be their onramp for future solid growth. Prime Minister Aso said Japan is halfway to full recovery which would take three years. Let’s hope another 18 months is all Japan needs to leave the long Heisei recession behind.

Kirin is successfully expanding overseas

Kirin is a large brewing group and a fixture on the Tokyo Stock Exchange. It has recently raised eyelids in Australia with a major acquisition spree.

In 2007 Kirin bought National Foods, an Australian dairy and fruit juice company, followed by the acquisition of Dairy Farmers, a leading dairy manufacturer, in 2008 and Lion Nathan in 2009 who owns some of Australian’s most recognised beer brands. Together they form the largest dairy company in Australia and the biggest supplier to the Woolworths and Coles supermarket chains.

With beer sales stagnating in Japan, Kirin started diversifying its portfolio a couple of years ago. Their goal is to create synergies between their businesses by exploiting economies of scope, purchasing in bulk and by creating cross sale opportunities. By 2015 Kirin hopes to generate 30% of its sales from outside of Japan. With these recent acquisitions they are already halfway there.

Although the economic crisis has stagnated profit growth, Kirin posted healthy earning of ¥91 billion for the first half of 2009. Which is approximately $1 billion in USD.

During the last couple of weeks, Kirin has been in merger negotiations with Suntory to create a potential Japanese food and beverage Juggernaut. Combined they would have the momentum to compete in overseas markets with giants such as Kraft and Pepsico.

Independent of the outcome of the merger talks, Kirin is going to turn heads in the years to come.

Prime Minister Kevin Rudd

Australia is the only ‘advanced’ economy that avoided a recession. Although GDP growth has been anaemic in the first quarter of 2009, Australia is set for a speedy recovery with minor bruises from the Global Financial Crisis.

Countries most heavily hit by the crisis have been those whose financial system have been exposed to sub-prime mortgages or those whose economy relied on the export of non-essential goods and services.

The export of minerals is a significant contributor to Australia’s GDP. Although the demand for minerals dropped in the second half of 2008, the demand has remained strong throughout the crisis. This is mainly because of China, who has allegedly been stockpiling minerals to prepare for a quick recovery.

Australia’s banks have remained safe and sound throughout the crisis. Many did raise cash to shore up their balance sheet as well as to fund acquisitions of smaller competitors.

Similarly to Australia, Japan’s banks had limited exposure to sub-prime mortgages. In the beginning of 2008, after a long recession, Japan had its Non-Performing Loan problem as well as deflation under control and its economy was growing at a slow but steady pace. When the crisis hit, Japan suffered tremendously from the sudden drop in demand for cars and electronics from overseas. The economy spiraled back into negative growth. Although the Japanese financial system was unaffected, the drop in exports was solely responsible for the degradation of the economy.

Let’s hope that with the Asian economies picking up steam again and some of the major European countries posting GDP growth, the GFC can be left behind us.

Prime Minister Aso likely to be unseated

On the 30th of August, Japan’s citizens will vote to elect a new government.

The two leading parties agree the economy is in dire need of revitalisation. With the ruling Liberal Democratic Party (LDP) having failed to fix the economy, the Democratic Party of Japan (DPJ) is expected to win voters’ confidence. The DPJ is expected to win not because of its fantastic plans, but because voters want to express their disapproval with the LDP’s mismanagement of the country.

With an ageing population and a national debt exceeding 200% of the country’s GDP, many doubt whether the pension system is going to be able to support them when they retire. The LDP’s credibility received a big blow when it became apparent the government lost a large amount of records. These records link who paid what amount into the pension scheme. This could potentially result in people not having access to the full amount of their retirement benefits.

The big industrial firms have always had a close relationship with the government. Government bureaucrats made sure fiscal policy funds were channelled to these enterprises while in return they would receive well paid, cushy positions in these firms when they retired. With an ailing economy, this system has been widely criticised. Why would bureaucrats receive such cushy positions when failing to increase the living standards for Japanese families?

With many DPJ party members failing to agree on a consensus on major policy issues, the question is whether a DPJ government will bring any real change?

Automobiles drive an increase in exports

Japan’s exports rose by more than 12% in the second quarter of 2009. Although this only compensates for less than half the 29% drop in exports in the first quarter, it is an important sign that Japan’s economy is getting back on track.

More than any other economy, Japan relies on exports for economic growth. This has been true in the boom days of the 1980s and it is still relevant today. Traditionally the weak domestic demand was due to inefficient firms in the local market that were protected from overseas competitors by high entry barriers. Although the Japanese government has made strides to open the market, a propensity to save and an aging population still dampens local demand.

Unsurprisingly the biggest export products are cars. Toyota, the biggest car manufacturer in the world, surprised analysts last week by forecasting a smaller loss than predicted earlier. Instead of losing 550 billion yen, it now expects to lose 450 billion yen this year. Analysts at Fortis Japan even consider it a possibility that Toyota will return to profitability in the next financial year.

Although the cash-for-clunkers program in the US has channeled quite a bit of money towards Japanese car makers, Japan’s rise in exports is mainly due to China. With Chinese GDP growth returning back to 15%+, Chinese domestic demand has picked up to the benefit of the rest of the world. An increase in income for the Chinese middle class is good news for Japan. After all, a motorised road vehicle is one of the first signs of personal wealth.