Japan's Economy Likely To Rebound: 5 Solid Buys

For the first time in two years, Japan’s economy slipped in the first quarter. The economy contracted 0.6% on an annualized basis in the first quarter thanks to an unexpected fall in capital investment and flat private consumption. This might cause a setback to Japan’s Prime Minister Shinzo Abe’s reflationary policies but the overall picture may not be all that gloomy.

Economists believe that this contraction is temporary and a bounce back is just a matter of time. Japan’s economy has expanded beyond expectations for more than a year now. In the days ahead, demand for capital goods is expected to boost exports. Also, growth in manufacturing activity increased in April. Moreover, the global economy is expected to grow this year, which will likely aid Japan’s exports. Given this scenario, it makes good sense to invest in Japan stocks.

Japan’s Economic Growth Shrinks

Japan’s economy slid 0.2% quarter over quarter in the January-March period, snapping eight straight quarters of economic expansion. The economy contracted 0.6% on an annualized basis, more than the median estimate of a 0.2% decline.

The slower growth can be attributed to an unexpected decline of 0.1% in capital investment. Japan’s economy had grown above its potential for more than a year, thanks to huge production and investment driven by robust expansion of exports. Private consumption remained flat in the first quarter after a 0.2% rise in the final quarter of 2017. Also, private residential investment declined 2.1% after a 2.7% fall in the fourth quarter of 2017.

Another major reason behind this contraction is that exports of goods and services have slowed, with a meager 0.6% rise compared with 2.2% in the fourth quarter. Understandably, being an export-heavy country, Japan has high hopes on a growing global economy.

Economic Growth to Rebound

Economists strongly feel that the slump is temporary. According to Toshimitsu Motegi, Japan’s Economy Minister, the government still believes that the moderate recovery in the economy is intact. He further anticipates economic recovery to be driven by private consumption and capital expenditure.

Interestingly, domestic demand was low in the first quarter, leading to a contraction in economic growth. Also, high vegetable prices because of bad weather and one-time selloffs ranging from stock market selloffs to a strengthening yen led to shrinking economic growth.

Overseas Factors to Boost Growth

Analysts and economists believe that overseas factors will hold the key to Japan’s economic growth. According to the International Monetary Fund (IMF), the global economy is expected to grow 3.9% in 2018 -- its fastest pace since 2011. This is likely to give a boost to Japan’s exports.

Also, U.S. tax cuts are likely to help the global economy rebound in the second quarter. Naturally, this will create overseas demand, resulting in higher exports of machinery and other goods from Japan. Interestingly, despite this slowdown, Japan’s manufacturing growth picked up in March.

Japan’s Manufacturing Purchasing Manager’s Index (PMI) increased 53.8 in April, marking the 21^st consecutive month of rising production in its manufacturing sector. Moreover, industrial output is expected to increase 3.1% in April. Also, inventories of electronic parts like flat panel displays and semiconductors rose 12.8% in March compared with 1.7% in February.

Our Choices

Japan’s economy may have slowed down for the first time in two years, but both economists and the government believe that the slump is short-lived. Given that the global economic outlook is bullish, exports are expected to rise in the second quarter and give Japan’s economic growth a solid push.

While adding Japan stocks to your portfolio looks like a smart option now, picking winning stocks may be difficult. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Advantest Corp. (OTC:ATEYY) is one of the world's leading automatic test equipment suppliers to the semiconductor industry, and is also a producer of electronic and optoelectronic instruments and systems.

The company has expected earnings growth of 23.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 30 days. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hoya Corp. (OTC:HOCPY) is a specialty manufacturer of optical glass. The company's business activities include information technology, eye care, medical and imaging systems

Hoya Corp has a Zacks Rank #1. The company has expected earnings growth of 20.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.2% over the last 30 days.

Sony Corporation (NYSE:SNE) designs, manufactures and sells consumer and industrial electronic equipment.

Sony has a Zacks Rank #2 (Buy). The company has expected earnings growth of 28% for the current year. The Zacks Consensus Estimate for the current year has improved by 9.1% over the last 30 days.

Nikon Corp. (OTC:NINOY) is a Japanese multinational corporation headquartered in Tokyo. It specializes in optics and imaging products.

Nikon Corp has a Zacks Rank #2. The expected earnings growth is 41.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.8% over the last 30 days.

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