Japan Contracts Again: 3 Stocks to Dump Now - Analyst Blog

Japan's economy contracted for the second successive quarter, surprising economists and market watchers. GDP declined 1.6% in the Jul-Sep period, following a contraction in the second quarter. Second quarter's contraction was revised from the earlier estimate of 7.1%, to a marginally worse number of 7.3%.

Causes for Contraction

Most estimates for the quarter had hovered around an expansion of 2% or more. However, official data revealed weaknesses in key economic sector. Housing and business investment gauges declined. Inventories of finished goods were also cut much more than expected. However, this could boost economic activity in the next quarter, since companies would have to produce in larger quantities if demand increases.

The factor which made a clear impact was a less-than-expected increase in consumption demand. Private consumption makes up 60% of the country's economic activity. This metric increased by 0.4%, from the second quarter which was 50% lower than most estimates.

Effects of Consumption Tax

This was possibly a result of a hike in the consumption tax in April from 5% to 8%. Analysts believe that this made it tougher for the country's populace to change their deflationary mindset. Consumer prices continue to increase as do corporate profits and the value of property and stocks.

However, a large part of the population has not gained from these developments. Wage growth remains behind the increasingly high cost of living. This calls into question some of the key tenets of Prime Minister Shinzo Abe's economic stimulus program, popularly known as Abenomics.

Likely Impact

Japan was already finding it difficult to tide over the impact of the increase in consumption tax. The central bank had increased monetary stimulus recently as its inflation target of 2% looks increasingly unattainable. However, the increase in consumption tax was viewed as a necessary step to consolidate the country's fiscal situation. After all, Japan has the largest amount of government debt compared to any other country.

But a second planned increase to 10% may now be put off until wage growth moves significantly higher. Additionally, the economy would have to grow at a much faster rate than earlier estimated in order for such an increase.

A key economic adviser has indicated that a rate of 4% would be the likely target. Speaking at the G20 conference in Brisbane, Abe said: “Raising the consumption tax is supposed to increase government revenues, but if we fall back into deflation it will all be for nothing.”

Meanwhile, it is likely that Abe will call for fresh elections in order to change the tax program. This is politically unnecessary, with the ruling coalition already controlling both houses of the legislature. However, Abe may still go ahead with such a decision so that the law could be changed in the manner that he wants to.

Our Choices

Here we will list 3 Japanese stocks that may witness further downside due to these factors. These stocks have witnessed downward estimate revisions recently. Moreover, share prices for each of these stocks have also declined considerably. All these stocks carry a Zacks Rank #4 (Sell).

Internet Initiative Japan Inc. (IIJI) is an Internet service provider which operates through two business segments. These are the network service and system integration units. The system integration unit provides Internet connection, outsourcing, wide area network (WAN) and system integration services to government and corporate clients. Earnings for the current year are projected to fall 10.2%.

Estimate Revision – Internet Initiative has seen 1 negative revision in the last 30 days for the current year estimates. Yearly earnings consensus has dropped from 46 cents a share to 44 cents.

Share Price – The stock has lost 31.3% year to date.

Kyocera Corp. (KYO) is primarily engaged in developing products for the information and communications sector. It operates through several business segments. These include semiconductor parts, fine ceramic applied products, electronic devices, communication devices and information equipment. Earnings for the current year are projected to fall 14%.

Estimate Revision – Kyocera has seen 1 negative revision in the last 30 days for current year estimates. Yearly earnings consensus has dropped from $2.14 a share to $2.02.

Share Price – The stock has lost 5.9% year to date.

Mitsubishi UFJ Financial Group, Inc. (MTU) operates in the banking sector. The company operates across various domains of the banking business. This includes credit card, security, trust banking, leasing and other businesses. Earnings for the current year are projected to fall 16.7%.

Estimate Revision – Mitsubishi UFJ has seen 1 negative revision in the last 30 days for current year estimates. Yearly earnings consensus has dropped from 66 cents a share to 63 cents a share.

Share Price – The stock has lost 13% year to date.

A section of economists is of the view that the next quarter could be a relatively good one for Japan's economy. However, the country is grappling with several worrisome problems at the moment. This is why it may be a good idea to drop these stocks from your portfolio.

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