What do you think of when you think of an emerging market?
No doubt you think of China, India and Brazil.
You may also think of small southeast Asian economies too such as Thailand or Vietnam.
Or maybe the emerging markets of Central America and Africa spring to mind.
But what if we suggested there’s another ‘emerging market’ that few others have considered? Yet it could be one of the best investment opportunities this year.
It’s not your usual emerging market. This one is a US$6 trillion behemoth. It’s the world’s third biggest economy. We’re talking about Japan…
OK. It may be a stretch to call Japan an emerging market.
We’re not sure that our emerging markets analyst Ken Wangdong will have Japan on his list of economies to watch.
But maybe he should. We can make a good argument that Japan has a lot of potential as a growth story. It has a strong history with innovation and technology.
And it has gone through 20 years of no or limited growth. But that could change. If it does there’s every reason to think that Japan could become a new kind of emerging market…a mature emerging market.
Rates lower for longer
Japanese stocks had a great run from late 2012 through to early 2013.
As you can see from the chart below, Japan’s Nikkei 225 index gained 70% from November 2012 through to May 2013:
Source: Google Finance
Click to enlarge
The trigger for the huge rally was the Bank of Japan’s announcement that it planned to double the size of the country’s monetary base. In other words, the BoJ planned to print a whole lot of new money.
Oh, and it plans to keep interest rates low too. (Refer back to yesterday’s Money Morning on the impact of low interest rates on stocks.)
In fact, when it comes to raising interest rates the general view is that the Bank of Japan will be the last of the major central banks to raise rates — assuming any central bank actually ever raises rates.
That means low interest rates and more money printing for longer.
Even so, how does that qualify Japan as an ‘emerging market’? Let’s look at it this way…
Japan to make a comeback
Check out the following chart. It shows the annual gross domestic product (GDP) for the United States, China, Japan, and India:
Source: Google, World Bank
Click to enlarge
Japan’s growth record since 1995 is dreadful.
During the 1990s Japan (yellow line) was in with a real chance of catching up with the US (green line) in terms of economic size.
But that ended with the bursting of Japan’s property and stock bubble in the early 1990s.
Since then Japan’s economy has done nothing but go sideways. But is all that about to change? Could Japan be on the verge of making a comeback to be the latest in emerging market opportunities?
Well, as the Financial Times reports:
‘Corporate profits rose to a record in the year to March; the central bank has an easy monetary policy; and the ruling Liberal Democratic party has outlined a new seven-point programme to “revitalise” Japan, putting investor-friendly measures — tax cuts, a new governance code — at the top of the list.’
Sure, Japan has its problems. One of the biggest problems is the huge amount of government debt. The other problem is the country’s ageing population.
But it’s not all bad news. Japanese companies have shown for decades that they can innovate, especially in technology and engineering.
In a perfect position to take advantage of China
That should give Japan an advantage against other emerging markets. It already has the infrastructure. It already has the know-how. And it already has the reputation for producing quality goods.
Despite that Japan is one of the most hated of any economy. Just say ‘Japan’ to any investor and they’ll respond with raised eyebrows and a smirk.
After more than 20 years of barely any economic growth few people are willing to believe that Japan can ever grow again. The general feeling is that Japan is addicted to money printing, and that it has forgotten how an economy should really function.
Add to that the ageing population and most see Japan as a basket case without a future.
We don’t buy that. We don’t buy the idea that a modern economy can forget how to function. This isn’t the Dark Ages where the innovation and knowledge from the great thinkers of Rome, Greece and Egypt was lost for 1,000 years.
This is simply an economy that has lost its way and needs a catalyst to get it back on track. That’s where the economic growth in the rest of Asia could provide a boon.
As emerging markets analyst Ken Wangdong explained to us yesterday, when it comes to certain precision goods, Chinese consumers don’t always trust their domestic manufacturers. Like consumers in the West, they want the quality handiwork from Japan and Germany.
In short, we’ll agree that calling Japan an emerging market economy is taking a liberty with the term ‘emerging market’. But how else can you describe it?
Most emerging market economies are emerging from under-developed or impoverished status. Japan on the other hand is emerging from two decades of non-existent economic growth.
To our mind — economically — there isn’t much difference.
Watch Japan. It could be one of the surprise ‘emerging market’ success stories over the next five years.