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Bank of Japan Maintains Optimistic Economic Outlook: 5 Picks

Swarup Gupta
Japan's economy has expanded at its fastest pace in two years in the second quarter.

On Sep 19, the Bank of Japan (BoJ) announced that it was keeping its monetary stance unchanged and affirmed that it would keep rates low in the long term. The BoJ also maintained its sunny view of Japan’s economy. Such a stance is particularly significant, since it comes at a time when trade tensions are threatening to impede the growth of the global economy.

The BoJ’s views come shortly after a report, which revealed that Japan’s exports had increased in August, defying trade war fears. Additionally, data released last week showed that Japan’s economy had expanded at its fastest pace in two years in the second quarter. Investing in stocks from Japan looks like a smart choice at this time.

BoJ Keeps Rates Unchanged, Maintains Economic View

In a move that was widely expected, the Bank of Japan decided to keep its short-term interest target unchanged at -0.1%. Additionally, it will continue to keep yields on its 10-year government bonds at around 0%. The decision to keep interest rate targets unchanged was taken by a 7-2 vote.

Overall, the BoJ said that it would keep rates at record low levels “for an extended period.” Further, Japan’s central bank added that the country’s economy was expanding at a moderate pace.

“Domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the corporate and household sectors,” the policy board’s statement added.  

Exports Rise, GDP Increases to 2-Year High

At this point, the country’s exports seem to be undeterred by global trade tension. The BoJ believes that robust global demand is providing a solid basis for exports. In August, Japan’s exports increased 6.6% year over year, exceeding most forecasts. August’s gain was also higher than July’s 3.9% increase.

Meanwhile, in the April-June quarter, Japan’s economy grew at an annualized pace of 3%. This is the fastest pace witnessed since the first quarter of 2016, much faster than previously reported. The upward revision is a clear indication that the world’s third-largest economy is rebounding after a temporary slowdown in the previous quarter, following two years of continued expansion.

The extent of growth can be mainly attributed to an increase in business investment. The capital expenditure component of GDP grew 3.1% in the second quarter, higher than the preliminary 1.3% growth. Also, this is the fastest growth since the beginning of 2015. (Read: Japan's Q2 GDP Growth Fastest in 2 Years: 5 Stocks to Buy)

Our Choices

The BoJ’s latest policy statement reiterates its robust view of the country’s economy. The fact that it has maintained its monetary policy stance implies that it will continue to keep rates low until it achieves its inflation target.

The recent increase in exports and robust GDP growth in the second quarter also indicates that its economy is in fine fettle. Investing in Japan’s stocks looks like a prudent 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.

Honda Motor Co., Ltd. HMC is a leading manufacturer of automobiles and the largest producer of motorcycles in the world.

Honda has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 4.1% over the last 60 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kyocera Corporation KYOCY is a developer, producer and distributor of ceramic and electronic components and information and telecom equipment.

Kyocera carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The company has expected earnings growth of 87.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 21.7% over the last 30 days.

Hitachi, Ltd. HTHIY is one of the world's leading global electronics companies.

Hitachi has a Zacks Rank #2 and VGM Score of A. The company has expected earnings growth of 6.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.9% over the last 60 days.

TDK Corporation TTDKY is a manufacturer and seller of electronic components.

TDK carries a Zacks Rank #2 and has a VGM Score of A. The company has expected earnings growth of 22% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.2% over the last 60 days.

ORIX Corporation IX is a diversified financial services institution with diverse operations in both corporate and retail finance.

ORIX carries a Zacks Rank #2 and has a VGM Score of B. The company has expected earnings growth of 9.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.8% over the last 60 days.

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