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Japan has tried for years to juice its economy by holding down interest rates at zilch while printing money at unprecedented rates. But the Land of the Rising Sun has been and will remain sluggish owing to an aging and declining population that goes hand in hand with dwindling consumer spending. Over the past eight years, the gross domestic product, GDP, expanded at annual rate of 0.2%. Household spending is shrinking along with the number of households. The country’s population fell from 128 million in 2011 to 127 million in 2015. Over the same years, GDP dropped from $5.94 trillion to $4.12 trillion, according to Focus Economics.
In the face of demographically-driven economic weakness, companies have eased plans for hiring and making capital investments. They have zero motivation to invest in more or better factories and equipment when sales are falling. UBS economists project 1.6% economic growth in 2017 and a 1.4% uptick next year.
A Technological Revolution
But not all is doom and gloom for the island nation. Here’s why you should consider investing in Japan’s stock market despite weak economic growth. Japan is benefiting from China’s technological revolution. Chinese factories are rapidly automating owing to rising labor costs and a declining labor force because of the one-child policy that was in force from 1979 to 2015. China increasingly relies on Japan’s innovations in robotics as factory automation rises.
Many innovative yet unknown companies stand to benefit from China’s demand for automation. All the while, the world’s hunger for Japan’s high-quality electronics and cars isn’t going away anytime soon. Exports have become a larger chunk of Japan’s economy over the past two decades.
Japan stock funds tracked by Morningstar climbed 6.5% year to date, through April 30, versus 13.3% for foreign large-growth funds. But the Land of the Rising Sun outperformed foreign markets longer term. Funds specializing in Japan returned 14.3% in the trailing year ending April 30. They rose 9.3% on average annually the past three years and 9.7% annualized the past five years. By contrast, world equity funds climbed 11.1% the past year and 2.6% and 6.3% over the past three and five years, respectively.
The flagship Japan ETF, iShares MSCI Japan, returned 6.1% year to date, through April 30, according to Morningstar. It added 15.8% in the trailing year. It gained 7.0% and 7.5%, annualized, the past three and five years. WisdomTree Japan Small-Cap Dividend Fund and iShares MSCI Japan Small-Cap ETF each lifted 9% year to date. They rallied 24.9% and 18.2% in the trailing year, respectively.