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Japan's Economy, Exports Likely to Pick Up: 5 Stocks to Buy

Ritujay Ghosh
The U.S. administration is mulling a settlement of the trade embargo on ZTE as part of the ongoing trade talks between the two warring countries.

President Donald Trump and Japan’s prime minister Shinzo Abe on Wednesday agreed to start a fresh dialogue and establish a new framework for trade and investment between the two countries. The trade talks are aimed at balancing United States’ trade deficit with Japan. Trump has been critical of Japan in recent times, describing the terms of trade between them as “not fair” because of the huge trade deficit with that country.

Additionally, Japan’s economy is gradually recovering and economists believe that the country is on track for stable growth and remain positive about the longer-term outlook. Moreover, Japan’s exports are expected to grow as there is high demand for capital goods in the United States. Given this scenario, this is a good time to invest in Japan’s stocks.

Trump-Abe Trade Talks Raise Hope

Japan is the fourth-largest trading partner of the United States, with the two countries trading around $200 billion worth of goods and services every year. However, Japan exports more goods to the United States than it imports from that country, leading to a huge trade deficit. According to the U.S. Commerce Department data, trade deficit with Japan totaled 68.85 billion in 2017. This makes Japan the third-biggest trading partner with which the United States is embroiled in a trade deficit.

Understandably, the figures have made Trump unhappy about the trade relations with Japan. So much so that on Friday, Trump even tweeted that he is “working to make a deal” with Japan, as he feels the trade deficit has been hitting the United States for a long time. The ongoing Trump-Abe talks at Palm Beach, FL, follow United States’ desire to initiate a free trade deal that would balance the trade deficit with Japan. "The United States has a massive trade deficit with Japan. It's anywhere from $69 billion to $100 billion a year. That's massive by any stand point," Trump said at a news conference post his meeting with Abe on Wednesday.

TPP Under a Cloud?

However, the two countries differ on the nature of trade partnership, especially with regard to Trans Pacific Partnership (TPP). While Japan prefers the TPP to be followed, the United States wants a bilateral trade policy, given that the country pulled out of the 12-country trade agreement shortly after he took office in January 2017. After that, the remaining 11 countries reworked the agreement into a Comprehensive and Progressive Agreement for Trans-Pacific Partnership. 

That said, it might not be difficult to establish a fresh framework for trade and investment as Trump last week, under pressure from Republican lawmakers, has asked his advisers to assess if returning to a TPP would be beneficial. Moreover, Japan too should be keen on reaching a balanced deal with the United States given that it is heavily export-dependent country, more so because it would try to avoid a trade conflict with the United States unlike China.

Japan’s Economy Likely to Pick Up

Japan’s economy grew faster in the last quarter of 2017 than initially estimated, expanding for eight straight quarters, marking the longest run of growth in 28 years. However, the growth might get stalled in the first quarter. According to a Reuters poll of economists, Japan’s economy is expected to expand at an annualized 0.5% in the first quarter, down from the annualized 1.6% growth in the fourth quarter of 2017. The slower growth can be attributed to weak factory output and consumer spending. However, economists are hopeful that the economy will pick up again, as the overseas economy is solid. 

Meanwhile, Japan’s exports also grew lower-than-expected in February, owing to a stronger yen and Trump’s criticism on the huge trade deficit with Japan. Exports grew a meager 1.8% in February on a year-over-year basis. Although the trade surplus with the United States decreased 0.2% on a year-over-year basis to $7.6 billion in February, it was too meager to avoid Trump’s criticism.

However, Japan’s exports to the United States grew 0.2% on a year-over-year basis. Although it’s a lot slower than the annualized 4.3% increase in February, this is perhaps a bright spot. According to senior economist Yusuke Ichikawa at Mizuho Research Institute, exports are likely to grow given the high overseas demand for capital goods.

Moreover, Japan’s Cabinet Office in its monthly report on Apr 16 said that the country’s economy is gradually recovering and despite an expected slowdown in the first quarter, economic growth will rebound over the course of the year. The government also said that consumer spending too is recovering, with households spending more on dining out and improvement in spending on home electronics.

Our Choices

United States’ huge trade deficit with Japan has drawn the ire of Trump. However, Trump is keen on extending talks with Abe, which has paved the way to a meeting of the two world leaders. Trump’s eagerness to establish a new framework to balance trade deficit with Japan will certainly boost the confidence of investors. Moreover, given that Japan is an export-oriented economy and there’s high demand for its capital goods, it likely that Japan too will try to strike a deal that will help its economy.

At the same time though Japan’s robust stretch of economic growth is expected to stall in the first quarter, economists and the country’s Cabinet Office are hopeful that it will rebound over the course of the year and that exports will pick up.

Adding stocks from Japan to your portfolio looks like a smart option at this point. However, picking winning stocks may be difficult. We have thus narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

DISCO CORP DSCSY manufactures and sells precision cutting, grinding and polishing machines primarily in Japan and internationally.

DISCO has an expected earnings growth of more than 11.9% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 30 days. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Bridgestone Corp. BRDCY is involved in the Automotive Industry. Its printing system allows for the real time, on-site creation of vehicle registration forms and license decals on blank stock, including the imprinting of the vehicle license plate number on the decal. 

Bridgestonehas a Zacks Rank #2 (Buy). The company has an expected earnings growth of 9.3% for the current year. The Zacks Consensus Estimate for the current year has risen 5.6% over the last 30 days.

Mitsubishi UFJ Financial Group, Inc. MUFG provides a variety of financial and investment services such as commercial banking, asset management services and trust banking.

Mitsubishi UFJ has a Zacks Rank #2. The company has an expected earnings growth of 7.3% for the current year. The Zacks Consensus Estimate for the current year has improved 2.8% over the last 30 days.

Ricoh Co. RICOY manufactures and markets office automation equipment. 

Ricoh has a Zacks Rank #2. The company has an expected earnings growth of more than 100% for the current year. Over the last 30 days, the Zacks Consensus Estimate for the current year has improved 7.7%.

Nidec Corp. NJDCY and its subsidiaries are primarily engaged in the design, development, manufacturing and marketing of small precision motors, mid-size motors, machinery and power supplies, and other products.

Nidechas a Zacks Rank #2. The company has an expected earnings growth of 23.3% for the current year. The Zacks Consensus Estimate for the current year has moved up 1.6% over the last 30 days.

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Nidec Corp. (NJDCY) : Free Stock Analysis Report
 
Ricoh Co. (RICOY) : Free Stock Analysis Report
 
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