The October edition of the Far Eastern Economic Review features an essay by one of the most well-known Japanese stock analysts, Merrill Lynch's (ticker: MER) Jesper Koll. As I promised this morning, the following is a summary of his reasons why Japan is back as a high-growth economy. Also for those interested in really understanding what's going on in Japan and what to look for going forward, refer to an earlier post of mine covering The Economist's special issue survey edition on Japanese capitalism.
• Koll believes Japan’s economic growth will be closer to 2.5% over the next 5-10 years instead of the 1.0-1.5% that many analysts expect.
• His optimism is based on the large reduction of excesses in corporate debt, capacity, and employment.
• He offers the following reasons why Japan is now free to grow and is no longer as hindered by fundamentals:
- Reduced cross shareholdings
- More competitive resource allocation
- Increased profits – And a recent broadening of profit recovery beyond blue-chips
- Improved balance sheets
• Regarding Japan’s record low interest rates: “Some companies are beginning to scrutinize their capital structures and are starting to lock in record low debt funding to fund new investments without diluting shareholders’ equity.�?
• Companies need to reinvest as factories are aging, now 12-years old on average, which is higher than the historical average of 8-9 years.
• The big drag from Japan’s globalization is over.
• The economic recovery underway is a job-rich recovery.
• Expect a structural upshift in productivity towards 2.8% over the next 5-10 years from current levels of 1.5%.
• Areas of concern: Japan’s overly-complex distribution system. And concern over relations with China in the areas of technology transfers, IP protection, and currency revaluation.
*In closing Koll offered the following upbeat outlook:
The chances of Japan re-emerging as a high-growth industrialized powerhouse are very high. This is based on the tremendously positive private-sector backdrop that has been created by Japan’s private-sector managers. The biggest risk to this scenario would be mismanagement on the part of public-policy makers. So far, Japan’s monetary and fiscal authorities deserve the highest praise for having coordinated their policies with the sole purpose of increasing Japan’s revitalization potential. A premature tightening of either monetary or fiscal policy is always a risk. For now, however, the prospects look good for Japan to once again become a powerful engine of Asia’s growth.