UBS House View Daily

Thought of the day

14.08 - Japanese GDP encouraging, but not the whole story

Japan looks set to take the G7 growth crown – at least for the second quarter. The country’s 4.0% annualized pace of GDP expansion in the April–June period, almost double consensus expectations, reflects solid gains in private consumption and business investment.

But in our view, this still doesn’t make Japanese equities attractive:

  • The uptick in growth does not yet signal a turnaround for corporate earnings, which we see growing at around 2–3%. Many of the drivers of recent performance, from a weaker yen to restructuring and a lower corporate tax, are beginning to lose their punch.
  • The BoJ’s yield curve control policy, which keeps a cap on 10-year JGB yields at 0.11%, will continue to limit earnings performance for Japan’s financial sector. In contrast, lenders in Europe and the US are in a sweet spot of rising yields but still ample liquidity.
  • Tight labor may be boosting consumption, but wage growth remains inconsistent, with average monthly cash earnings declining in June by 0.4% year-on-year. The last time cash earnings growth surpassed 1% was in July 2016.

So while we continue to spot specific company opportunities in Japan that stand to benefit from tightening labor markets or growing demand for automation, we do not shift to an overweight on Japanese stocks as a whole.

Chart of the day

Japanese GDP encouraging, but not the whole story

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