Investors should not ignore the fact that Japan’s economic recovery is finely balanced, with high oil prices and a shrinking population among the problems that must be addressed sooner or later.
As the Japanese stock market hits four-year highs, investors are shrugging off two crucial factors that could derail the reform of the world’s second largest economy and stop an economic recovery in its tracks.
The snap elections called by prime minister Junichiro Koizumi hinge on his radical plans for privatisation and reform of the post office, a state behemoth that has about $3300bn in deposits.
Parallel budget
The funds have been used for political purposes, including buying up government bonds and building massive public works projects of often dubious value, leading to a parallel budget and distortions in the state’s ability to control spending.
Also, the unfair competition has been one of the reasons that Japan’s banks have encountered so many problems. With 25,000 post offices around the country all acting as banks, the big banks cannot compete.
Reform of the post office could be wrecked if the opposition gained power in the September elections. But this could also happen if Mr Koizumi returned to power, since his Liberal Democratic Party is divided on the issue.
Meanwhile, with the oil price hitting $65, Japan’s slow economic recovery – domestic demand is finally rising – may be in jeopardy. The country imports all its oil and has no alternative hydrocarbon resources. With the price of oil up about 50% since the beginning of the year, the economic recovery looks far from sustainable.
More deaths than births
To add to its woes, in August, the country’s health ministry raised the possibility that Japan’s population will start to shrink this year, two years earlier than previously forecast. Deaths exceeded births by more than 31,000 in the first half of the year, raising the prospect that the problems associated with an ageing population and a falling birth rate need to be dealt with even more urgently than expected.
The Japanese stock market may well be undervalued compared with other stock markets. But investors should also focus on the fundamentals, as the country faces its biggest political and economic tests of this century.
