Japan's economy and earnings: a look at the surprising GDP numbers

The Land of the Rising Sun has been printing some solid economic figures in the recent quarter, surpassing even the most optimistic predictions. Japan's 2Q CY GDP growth reached an annualized rate of 6% QoQ, outstripping the +2.9% consensus and showing a QoQ growth of +1.4%, beating the +0.8% consensus. Exports/ Services grew 3.2% QoQ and 13.6% annualized and growth was also supported by a big drop in Imports. Let's delve into the numbers to understand the major contributors behind this growth.

Exports and Tourism

While many might be tempted to credit the favourable yen exchange rate for this surge, while undoubtedly a tailwind and supportive, it is not the sole hero of this story. For instance, if we look at operational performance, companies like Toyota present a convincing case. For the automaker, the volume and mix outstripped foreign exchange gains by a ratio of more than 5:1. And it's worth noting that their full fiscal year guidance is still pegged at Y125/$, giving them a significant cushion against unforeseen market shifts.

Yet, there's another comeback kid – tourism. Tourism gets catalogued as an export rather than a part of consumption in the economic data. With the latest tourist arrival numbers for July strong, this snap recovery has only just begun and its positive contribution to Japan's GDP might become more evident again.

July's Statistics

July showcased a growth of +11.9% MoM and a staggering 1501.1% YoY. Even with such impressive stats, the figures are still 22% lower than the zenith of 2019, indicating a reservoir of untapped potential. Two factors that stand out from the data are:

1. Chinese Tourists: Back in CY19, Chinese tourists constituted 30% of arrivals and were responsible for 40% of the spending. By July, their share still only stands at 14%. But with China recently lifting travel restrictions to Japan among 77 other countries, the number of arrivals should surge.
2. Growing Momentum: In March '20, Japan saw 1.7 million visitors. Come July, that number had shot up to 2.3 million demonstrating improving momentum.

Supporting these figures is the yen's exchange rate. With the yen shifting from Y109/$ to Y145/$, Japan has emerged as an affordable luxury for international travellers. It's even being hailed as "the perfect destination for those who can't afford Thailand". This rate takes us back in time, aligning with the real effective exchange rates of August 1973. Japan is clean, it is save, it has some outstanding scenery, food and entertainment. 

For those looking to get a slice of the tourism pie, think of Asahi Group – as in a cold Asahi Super Dry.

Impressive Earnings Numbers

The 1Q FY23 results have been unveiled, and they were good. Japan's corporate performance has exceeded historic averages. The progress versus full-year guidance for most companies stands at 29.6% versus the historical first quarter average of 27.9%. Most notably, heavyweight Toyota Motor is set to shine in the run-up to first half results.

Moreover, the non-financial Operating Profit (OP) is at an all-time high, and it is outstripping the real GDP performance. This suggests that the pandemic, in a twisted way, has presented companies with an opportunity to optimize, be more efficient, and continue to edge out a sustainable competitive advantage.

Conclusion

With sentiment going through a quiet period during summer, without fail, the media and strategists will be saying “it’s all going horribly wrong in Japan and foreign money is leaving” and “the easy money has been made” which, as Nick Smith, strategist at CLSA, puts it “this is only ever said by the people who didn’t make that money – the Walter Mittys of the investment community”. However, historically money flows out every year, after a quiet summer, followed by a strong foreign buying come back in size, triggering yet another media response saying “foreigners are buying”. We remain constructive on Japan and would use a summer lull to pick up names that have a sustainable competitive advantage, the ability to generate future free cash-flow, are allocating capital efficiently and offer an attractive risk-return profile.