Can Abenomics 2.0 Boost Japan? 4 Picks

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After negotiating difficult defense reforms, Japan's prime minister Shinzo Abe turned his attention to the economy last week. Unveiling a new set of economic initiatives, which he has dubbed "Abenomics 2.0," Abe promised to take Japan into a new era of prosperity. His proposals have met with bouquets as well as brickbats. Some economists and market watchers have questioned the viability of the proposals.

Others have attracted attention to the fact that reforms proposed earlier have not been completed as of now. Additionally, several older economic targets remain elusive. However, on closer analysis, Japan's economic situation is not as fragile as is widely depicted. This is why it may be a good idea to pick stocks which are poised to benefit under existing conditions and will gain further as the economy continues to gather steam.

Abenomics 2.0

Speaking at a news conference last week, Abe outlined several new policy measures which he calls "Abenomics 2.0." Abe spoke of new targets or his new "three arrows": achieving a higher GDP over the next five years, providing support for child care and better social security. The last two are aimed at improving child rearing and care for the elderly for economically distressed families.

Abe said that he is aiming to achieve a GDP of 600 trillion yen ($5 trillion) for Japan by 2020. Japan's GDP stood at an estimated $4.6T in 2014 and has declined at an annualized 1.2% over the Apr-Jun quarter. Real GDP has to increase at a minimum of 2% to achieve 594 trillion yen by 2020 and 616 trillion yen by the next year.

Another major goal is to increase Japan's fertility rate from 1.4 to 1.8. This will be achieved by providing free preschool education, offering support for the treatment of infertility and a higher level of support for families with only one parent. The target is to ensure that the country's population remains above 100 million over the next 50 years.

Abe also aims to boost social security by offering care to the nearly 150,000 people who are slated to enter nursing homes. He also said that he would increase employment opportunities for the retired. Several prominent newspapers and economists have questioned where Abe will find the resources to fuel the last two initiatives.

Abenomics in Action

Market watchers and economists have also pointed to the fact that several of Abe's initial targets remain unfulfilled. Others question the efficacy of the first phase of Abenomics and have argued that only monetary policy has proved to be effective. However, a recent assessment of the state of Japan's economy by the Financial Times tells us a different story.

The study has praised Abenomics' record on improving corporate governance standards. The objective of these changes has been to increase return on equity and raise the number of independent directors. The ability to push through reforms in the agricultural sector has also been praised.

Similarly, the initiative to bring more women into Japan's workforce has also been praised. Female equality has hit an all-time high of 65%, following a new law mandating large corporations to release data on female managers. Abenomics has also been rated highly on power sector reforms.

Additionally, the country's unemployment rate of 3.3% is much lower than several developed economies. Real monthly wages recorded their first yearly increase in July in more than two years. Additionally, the average wage increase for fiscal 2015 is 2.2%, the highest level achieved in 17 years.

Meanwhile GDP deflator, which is an inflation gauge, has increased on a yearly basis over five successive quarters. Such record increases were last recorded more than twenty years ago. Nominal GDP has increased 5.8% during Abe's tenure, a rate last witnessed in 1997.

Our Choices

Given the enormity of the task he has set himself, several of Abe's targets may be difficult to achieve. However, the first phase of Abenomics has brought about several positive changes. Additionally the state of the economy has improved during Abe's term and may soon witness further beneficial changes.

This is why it may be a good idea to invest in stocks from Japan, which can gain from the positive changes Abe proposes to bring about. We have narrowed down our search based on a good Zacks Rank and other relevant metrics.

NTT DOCOMO, Inc.DCM offers mobile telecommunication services. It has three operating segments, Telecom, Smart Life and Others.

NTT DOCOMO has a Zacks Rank #1 (Strong Buy) and its estimated growth for the current year is 28.2%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.73.

Nippon Telegraph and Telephone CorporationNTT and its subsidiaries offer a wide range of telecom services.

Nippon Telegraph and Telephone has a Zacks Rank #1 (Strong Buy) and projected growth for the current year is 28.1%. It has a P/E (F1) of 13.74, lower than the industry average of 16.01.

Nidec CorporationNJ is a manufacturer of electric motors and related equipment and components.

Nidec has a Zacks Rank #2 (Buy) and expected earnings growth of 47.2% for the current year. The company's PEG ratio is 0.99, lower than the industry average of 1.12.

Sumitomo Mitsui Financial Group, Inc.SMFG operates in the banking sector and also offers other financial services and products worldwide.

Sumitomo Mitsui has a Zacks Rank #2 (Buy) and projected growth for the current year is 2.2%, compared to the industry average of negative 0.7%. It has a P/E (F1) of 7.95, lower than the industry average of 9.62. Its Price/Sales (P/S) ratio of 1.27 compares favorably with industry average of 1.36.

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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

NIPPON TELE-ADR (NTT): Free Stock Analysis Report

NTT DOCOMO -ADR (DCM): Free Stock Analysis Report

NIDEC CORP-ADR (NJ): Free Stock Analysis Report

SUMITOMO-MITSUI (SMFG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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