Japan's latest GDP report has delivered a well-timed boost to prime minister Shinzo Abe's reforms push. The country's economy has now expanded for the longest period since the 1980s, powered by an increase in domestic spending.
Despite a decline in the annualized pace of growth, the latest report is a bullish signal for the Bank of Japan (BoJ). A spurt in consumer spending indicates that the economy may be gearing up to push consumer prices toward the central bank's 2% target for inflation.
Meanwhile, the BoJ is unlikely to roll back its stimulus measures as long as the country's inflation target remains elusive. Also, Abe continues to pursue fiscal and structural reforms, which make this a good time to invest in Japan's stocks.
Longest Growth Streak in 28 Years
In December, Japan's economy expanded for the eighth consecutive quarter, marking the longest period of growth since 1989. The longest stretch of expansion on record prior to this was the 12-quarter period between April-June 1986 and January-March 1989. This period coincides with the time when Japan suffered from an infamous economic bubble.
During the period between October and December, Japan's real GDP increased at a monthly rate of 0.1% or at an annualized pace of 0.5%. This was however lower than most estimates which put annual and monthly increases at 0.2% and 0.9%, respectively. It is also lower than the 2.2% annualized pace recorded during the July-September period.
Domestic Demand Drives Expansion
However, Japan's real GDP still increased by 1.6% during 2017, the sharpest rate of growth recorded since the 2% expansion recorded in 2013. Moreover, the latest quarter of growth was powered by an increase in domestic demand. Private consumption increased by 0.5% over the last quarter, the first expansion experienced in six months.
Further, this increase comes after a 0.6% decline in consumption during the July-September period. Additionally, capital expenditure increased by 0.7%, recording its fifth straight quarter of growth. External demand remained more or less unchanged with imports and exports increasing by 2.9% and 2.4%, respectively.
BoJ's Stimulus to Remain Firmly in Place
Japan's current stretch of growth has been largely powered by the raft of stimulus measures undertaken by Abe's government and the BoJ. And despite such an extended phase of expansion, monetary stimulus is unlikely to be discontinued in the near future. A rising yen and current sluggishness in consumer prices will likely force the BoJ to keep such measures firmly in place.
However, the expansion in consumer spending is an exceedingly positive development. This indicates that consumer prices are likely to pick up in the near future. Additionally, several economists believe that Japan's economy is currently in a strong position. A pickup in wages and improving quality of jobs is resulting in higher consumption levels, which in turn is fueling economic growth.
Japan's current expansionary phase is a product of Abe's fiscal and structural reforms and the BoJ's long running monetary stimulus program. These measures have delivered tangible results on the ground and are likely to fuel growth over an extended period in the future.
Adding stocks from Japan to your portfolios looks like a smart option at this point. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.
Sony Corporation SNE designs, manufactures and sells consumer and industrial electronic equipment.
Sony has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved by 14.2% over the last 30 days.
Canon Inc. CAJ is a manufacturer and seller of professional and consumer imaging equipment and information systems.
Canon has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 5.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.7% over the last 30 days.
Nitto Denko Corporation NDEKY is a provider of electrical insulating materials such as double-coated tapes, sealing materials, masking tapes, surface protection materials and non-skid tapes in diverse segments of industry.
Nitto Denko has a VGM Score of A. The company has expected earnings growth of 56.4% for the current year. The stock has a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .
Hitachi, Ltd. HTHIY is one of the world's leading global electronics companies.
Hitachi has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 48.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.2% over the last 60 days.
Komatsu Ltd. KMTUY is the world's second largest manufacturer of earthmoving and construction machines.
Komatsu has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 51.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.7% over the last 30 days.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Nitto Denko Corp. (NDEKY): Free Stock Analysis Report Sony Corp Ord (SNE): Free Stock Analysis Report Hitachi Ltd. (HTHIY): Free Stock Analysis Report Komatsu Ltd. (KMTUY): Free Stock Analysis Report Canon, Inc. (CAJ): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research