It’s important to note that over the last 20 years, none of these earnings metrics has shown any correlation to Japanese GDP’s relative stagnation. To reiterate, Japan, Inc. has grown profits from its global operations, while Japan’s local economic performance has languished.
In a nutshell, performance in the Japanese equity markets thus far has been strongly supported by earnings growth. When people talk about the Japanese economy and whether it can weather another bout of a consumption tax hike in the future, remember an important formula: GDP growth ≠ profit growth, or stated differently, GDP growth ≠ equity market potential.
Japan, Inc.’s overall profit profile is clearly being boosted by its global nature. This is one reason WisdomTree has focused on the exporters of Japan that we think are bound to reap longer-term gains from the more competitive yen exchange rates. This is a new trend that we see in place for the coming years based on shifting monetary accommodation at the Bank of Japan and the U.S. Federal Reserve. We thus think investors should stay favorable to Japan despite the recession headlines.
1Sources: WisdomTree, Bloomberg, 11/30/12–10/30/14, numbers are based off of the forward earnings filed on Bloomberg.
2Sources: WisdomTree, Bloomberg, 11/30/12–10/30/14, numbers are based off of the on forward P/E filed on Bloomberg.
Important Risks Related to this Article
Investments focused in Japan are increasing the impact of events and developments associated with the region, which can adversely affect performance.