Japan’s 1.5 per cent rise in output in the third quarter was met with a yawn by the markets. Was this the right reaction? Even though it was six per cent on an annualised basis, and therefore impressive compared with the 2.5 per cent growth in the US, and even more so compared to the lower-than one per cent in the eurozone, the markets may be right.
These latest gross domestic product figures will probably encourage analysts to stick with the current broad outlook for next year. The consensus view is that Japan will grow by around 2.2 per cent, the US between 1.5 and two per cent, and the eurozone by around 0.5 per cent. It is quite remarkable that on average forecasters expects Japan to be stronger than either the US or the eurozone. In essence, the consensus – backed up by depressed equity markets and low bond yields for the G7 countries - expects a “Japanisation” of these countries’ economies. The markets are assuming Japan’s post-tsunami recovery is nothing other than a recalibration for lost GDP, and that the rest of the G7 will join Japan in years of dull, or worse, growth.
I am not so sure about a number of aspects of this outlook. If Japan could sustain GDP growth above two per cent for a full year, it would be a positive step. If key export markets, especially China, succeeded in achieving a so-called soft landing, perhaps post-tsunami Japan will exceed expectations. A positive economic surprise could have a powerful uplifting impact on Japanese equities at a time when the market’s dividend yield is higher than the yield on ten-year government bonds, and the country’s one year forward price to earnings ratio trades near its lowest levels for 30 years.