Saturday, 3 May 2014

Japan's Economy Hiccup And Saizen REIT

With the raising of the sales tax from 5% to 8%, we are currently witnessing declining domestic consumption in Japan. Is this policy going to affect Japan's economic growth? I do believe that going forward, Japan has to start making real and suitable structural reforms to its economy before the worsening of its economy. Quantitative easing by the Bank of Japan and huge fiscal spending by the Japanese government can only aid the economy to grow to a limited extend, and the staggering public debt threatens the root of the Japanese economy. The fundamentals of the Japanese economy need to be fixed before it can escape from its decades of deflationary pressure.

However, Japan remains a largely closed society and that has prevented it from moving forward to a limited extent. With declining population and a growing old age problem, it would appear that opening its door up to migrant workers might make its economy competitive again. This is a structural solution to the Japanese economy but has never been put up for serious debates. Say what you will about Singapore, but our open door immigration policy has made the Singapore economy one of the most competitive in the world.

Next, a depreciating YEN has to be substantiated with a growth in current account surplus. However, the trade balance of recent months in Japan have been disappointing. The Japanese economy is now at a deadlock, and it has to tread forward carefully, before its internal debts materializes into external debts issues when more and more Japanese grow disillusioned with the country.

Structural reforms are the key to any economic policy. Throughout history, we have always witnessed changes to an economy when there is a crisis. For example, Singapore has repeatedly use its employer CPF contributions to withstand the effects of financial crisis in order to maintain a near full employment situation. China has carried out banking reforms and moderate its exchange rate to keep its economy competitive and grow its public and private holding of foreign assets. Japan is now at a crisis, the threat of decreased liquidity is real as market expectations change, and more easing by BOJ might dampen the economy and worsen its Current Account.

With that said, some of my readers might remembered that I have invested in Saizen REIT. Am I still confident of its growth prospects? The fact is, I foresee earnings to be relatively stable in the next 2 to 3 years. I will still be collecting my dividends regularly on time. I will not sell off this REIT unless exchange rate depreciates significantly against the USD. This is because of all the properties held by Saizen REIT, most are in relatively densely populated areas. However, if there is a clear sign that the Japanese economy can grow no longer and the YEN will never appreciate again and general prices and wages remain low, I will sell Saizen REIT. Even though I really feel strongly for this REIT, I want to be an investor who is rationale and profitable. Until then, a decreased price just presents more value for Saizen REIT.

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