Markets: Japan's private sector Scrooges

Japanese GDP figures showed an increase of 0.6 per cent for the second quarter, missing analyst estimates of a 0.9 per cent increase on the previous quarter. This increase is the third consecutive quarter of expansion.

Although the GDP growth missed analyst expectations, the victory lies in that Japan is finally experiencing some economic growth, which appears to be sustainable under the current stimulus program.

Muted investment from businesses was behind the lower numbers, clipping capital spending for the sixth straight quarter.

Japanese companies are seemingly going in the opposite position to Australian companies. They are sitting on impressive profits and currently hold the most cash per share in around 13 years. Reporting season for the second quarter has nearly finished with the average profit a 103 per cent increase on the last quarter.

This has been achieved through the help of refreshed consumer spending encouraged by Prime Minister Shinzo Abe’s plans to snap Japan out of 15 years of deflation and work towards a target of 2 per cent inflation.

For this plan to be effective, businesses must participate by increasing investment, dividends paid out or higher wages. Sitting on profits isn’t going to be of any benefit with the current inflation targets being aggressively pursued.

Growth is central to Japan maintaining an economic standing on a global scale. To continue working towards this, businesses must be further enticed to spend – they have the comfort consumers will be there to mop up extra supply. Consumer spending contributes to 60 per cent of the economy.

The lack of spending by Japanese companies brings into question the effectiveness of aggressive monetary and fiscal policy to achieve growth objectives.

The stimulus program of doubling the purchase of bonds to flood the economy with cash (think the US) and fiscal policy of increasing government spending being pursued by Japan is helping manipulate demand. But the latest GDP breakdown figures indicate it probably isn’t happening as uniformly as anticipated.

The Nikkei has put on 42 per cent since the December election of Abe’s Liberal Democratic Party. With the yen falling, exporters have become competitive on a global scale once again and helped move the index along.

Part of the stimulus program is effective, with asset prices begin to inflate.

Also over this time, investor confidence is back with a convincing renewed interest in Japanese equities. Compared with the prior 18 months, volumes are up over 80 per cent over the last six months.