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Japan Is Back in Recession. Time to Buy Japanese Stocks?

2014/11/18

 For the third time in four years, the Japanese economy has skidded back into recession, as the country’s output unexpectedly shrank for a second straight quarter, according to preliminary data released by Japan’s Cabinet Office on Monday.

Economists had expected Japan to rebound from an awful second quarter in which GDP contracted by an annualized 7.3 percent following an April increase in the country’s sales tax. Instead, the economy took another dip, with real GDP contracting by an annualized 1.6 percent in the third quarter.

So is it time to buy Japanese stocks? No, seriously.

Tokyo’s Nikkei index lost 3 percent after the surprising GDP news, but analysts at Capital Economics on Monday made the case that the disappointing growth figure provides some reasons to be relatively optimistic about Japanese shares. “The news has actually prompted us to predict even more yen weakness and a stronger outperformance by Japanese equities in the year ahead,” Julian Jessop, the firm’s chief global economist, wrote in a research note.

Related: The Eurozone Economy Is Not in Recession, but Is Still a Mess

That prediction is grounded in expectations that the Bank of Japan, which recently announced surprisingly aggressive stimulus measures, will have to keep its policies much more aggressive, especially as compared to the U.S. Federal Reserve. And an adviser to Prime Minister Shinzo Abe has already called for a fiscal stimulus package of more than $25 billion, too.

“In short, Japan’s drop back into recession will strengthen disinflationary pressures and reinforces the divergence in the prospects for monetary policy relative to those in the U.S.,” Jessop wrote. “We expect the Fed to raise interest rates sooner and further than the markets currently anticipate, with the first hike coming in the first half of next year and perhaps as early as March. In contrast, the Bank of Japan has just stepped up its asset purchases and will probably have to do substantially more.”

Related: Landmark China/Hong-Kong Stock Trading Scheme Starts Nov. 17

Jessop said, based on his forecast for a weakening yen and the recent relationship between the currency and Japanese equities, the Nikkei could soar from its current level just below 17,000 to 23,000. “In reality there may be other factors pulling the other way — notably the performances of overseas markets, the state of global risk appetite (the main risk to our yen forecast), and the progress on other elements of ‘Abenomics,’” Jessop wrote. “On balance, then, we are raising our end-2015 forecast for the Nikkei from 18,000 to 20,000 – still a gain of around 18 percent from Monday’s close of 16,974.”