Bulls And Bears On Japan: Value Investors Dive In

The coronavirus has been taking a toll on China, but its neighbors are also feeling the effects of the outbreak. Japan is certainly not shielded from it, although the bull/ bear debate on Japan has been going on since well before the coronavirus was reported.

A weaker-than-expected GDP reading for the fourth quarter had many investors leaning bearish on the Japanese market, but it seems the tide is starting to turn. So is now the time for the bulls or the bears to come out in Japan?

bulls bears japan

Bulls/bears on Japan: coronavirus impacts

The biggest factor in the bulls/ bears debate on Japan right now is the coronavirus. In a report dated Feb. 17, Nomura analyst Takashi Miwa set out three scenarios for the impact the outbreak will have on nations around the world, including Japan.

His base case assumes that major Chinese cities remain locked down until the end of February. In this scenario, he estimates that Japan's annual real GDP will shrink 0.5%. That's 0.7 percentage points below his previous forecast and includes both the coronavirus impact and the weaker-than-expected fourth-quarter GDP number.

His base case assumes a decline of 42 percentage points in inbound tourist arrivals and tourist spending. It also assumes a drop of 10 percentage points in exports to China during the first quarter. He assumes a similar decline in corporate capital expenditures, although not quite as much as exports. He also predicts a "slightly negative impact" on domestic private consumption.

This scenario assumes a decline of 1 percentage point in overall real GDP for the first quarter. It also assumes a rebound in the second and third quarters, although not enough to recover the demand that was lost in the first quarter.

Miwa doesn't expect Japan's central bank to offer any kind of policy response in his base case. He notes that the Bank of Japan is "running low on additional policy instruments" to address the GDP slowdown. Additionally, the response of the yen versus the U.S. dollar to the coronavirus news has not been significant, so there is some flexibility for the central bank to address appreciation in the yen.

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