Stimulus Spending May Boost Stocks

Tetsuro Miyachi
Head of Investment Management
Franklin Templeton Investments Japan Limited

Japan's current recession has been quite severe, but some indicators suggest the economy might have hit bottom at the end of the first quarter of 2009. We, therefore, believe it is risky for our strategy to diverge too aggressively from the mean at the moment. As a result, we continued to reduce FTIF Franklin Templeton Japan Fund's active risk by cutting the portfolio's active weight in each industry over the first quarter, and we are now waiting for greater clarity before taking on more aggressive positioning.

Nevertheless, we have also identified some investment opportunities within these circumstances. Demand from the private sector is likely to remain weak for some time, but the aggressive economic stimulus measures being implemented by governments around the world are likely to benefit several Japanese companies and sectors.

For example, Japanese construction companies, cement makers and the housing industry could benefit from the measures implemented domestically. In the United States, the Obama administration's green-focused stimulus package could help sectors and stocks related to ecological conservation and the environment, not only in the United States, but also in Japan and Europe. In China, several stimulus measures are centered on infrastructure spending, which could boost Japanese trading companies, iron manufacturers and marine transporters.

Meanwhile, the automobile industry has begun to show positive signs as a result of steps taken in Germany, China and India. Even in the United States, auto sales in March rose from the previous month. In Japan, automobile exports suffered substantially due to the industry's downturn, especially at the end of 2008, and the decline played a significant role in widening Japan's trade deficit, which reached its largest level on record in January 2009. To counter the downturn, Japanese auto manufacturers have been reducing the inventory of cars sent overseas, and the slowdown in production has significantly outpaced the decline in sales. For this reason, we believe car production levels for Japanese companies should recover in due course.

With regard to the direction of the Japanese stock market, we believe the Tokyo price index (TOPIX Index) has the potential to rise about 20% from current levels. Since 1990, the TOPIX has experienced periods of short, sharp gains when its market value climbed more than 40%. Judging from this past experience, we think the TOPIX could possibly climb to 1000, potentially by the end of the second quarter of 2009, which would be a 40% gain from the low level of 698 the index recorded on March 12, 2009.

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FTIF - Franklin Templeton Japan Fund