Too much attention is paid to overall growth of income and output on a country level rather than individuals, according to Charles Stanley’s John Redwood, who argues this can sometimes be a better indicator of an economy’s health.
“Income per head is in some ways more important than aggregate national output,” explained Redwood. “People want to feel better off and to be better off.
“If a country’s economy grows because more people have come to live and work there without any improvement in average living standards, there is not the same improvement in confidence and wellbeing you get if the economy has grown because income per head has gone up.”
The Charles Stanley chief global economist said one of the best performers at increasing GDP per head since 2009 has been Japan, where it has risen by 13 per cent.
“This has been disguised by a falling population, which makes the more normal output and income figures look disappointing,” he explained.
This has led to some investors overlooking the country despite some strong fundamentals.
Japan’s strong growth puts it on a par with the US, UK and Germany, which have also recorded double-digit gains in GDP per head since 2009, according to Redwood, leaving them at above pre-crisis levels.
However, other countries such as Spain have only just returned to pre-crisis levels and Greece is almost one-quarter down on the pre-crisis highs. Key eurozone economy France, meanwhile, has managed just a small gain over 2008 levels, said Redwood.
Performance of indices since 1983
Source: FE Analytics
“Japan is often undervalued compared to other advanced markets as people are suspicious of the continuous monetary experimentation and the apparently low growth owing to population decline,” said the economist.
“The stock market reached a spectacular peak at the end of the 1980s and has still not regained those levels.”
In local currency terms the TSE TOPIX and Nikkei 225 indices are up by just 165.56 per cent and 164.26 per cent since 1983 and the TOPIX is down by almost 50 per cent from its peak in 1989, according to data from FE Analytics.
Indeed, Redwood said the Japanese market has struggled during the past few decades as the Bank of Japan has embarked on monetary policies aimed at stimulating the economy, using measures such as low and negative interest rates and aggressively buying back government bonds to maintain liquidity.
Under prime minister Shinzo Abe’s economic reforms labelled ‘Abenomics’, Japanese authorities have tried to reinvigorate the economy.
“Large programmes of quantitative easing and ultra-low rates have helped stimulate a bit more activity, but have not led to much inflation,” he said. “This year has been disappointing with two down quarters punctuated by some growth in the second quarter of the year.
“Inflation has remained at 1.4 per cent, whilst the average growth rate in total GDP has been around just 0.5 per cent a year since 1980.”
Quarterly GDP growth (%)
Source: OECD
The absence of serious inflationary pressure has been attributed to a large ownership of public debt by Japanese savers and institutions, which means there is little imperative for the authorities to tighten policy, said the Charles Stanley economist.
There have also been challenges for corporate Japan, said Redwood, which has struggled to become as aggressive over profits and margins as competitors in the west.
“The big Japanese crash did a lot of damage and cast a long shadow over assets and the economy generally,” he added.
Japanese authorities have an urge to try to create more normal policy: raising rates and working towards a lower deficit. However, this has been fraught with problems in the past.
“The last time they tried this there was consumer buying ahead of the event and then a long trough with confidence damaged,” the economist explained.
“This time they are trying to think of offsets to prevent too big a fall in spending. The Bank of Japan has been experimenting with buying fewer government bonds.”
He added: “Whilst the gross debt is very large compared to GDP, the Bank of Japan now owns well over 40 per cent of it.
“The system is so far surprisingly stable, with so many of the bonds bought in and with the balance of the debt financed at such low rates of interest.”
As such, markets may worry that any small move toward normal conditions could set Japan back, according to Redwood.
However, for investors looking to take advantage of steadily rising living standards and a greater level of GDP growth per head than other developed markets, Japan can provide some interesting opportunities.
“Shares listed in the country look reasonable value and will benefit as and when the authorities recognise again that ‘abnormal is the new normal’,” he said.
As the below chart shows, the blue-chip TOPIX 100 index has risen modestly over the past decade by just 81.41 per cent – in local currency terms – compared with a 195.54 per cent rise in the S&P 500 index, although at a faster rate than the FTSE 100 when dividends are excluded.
Price performance of indices over 10yrs
Source: FE Analytics
“The decline in population, the trend to more elderly people as a proportion of the total and the absence of wild inflationary tendencies makes Japan different,” concluded Redwood.
“The government will have to worry more about the poor growth performance this year and less about their continuing to borrow huge sums at no interest rate to try to keep people in work.”