Investors are worried about the slow pace of U.S. economic growth, but we’re just one player in the international arena. To assess the global outlook, two numbers are critical: China’s gross domestic product and Japan’s inflation rate.
They’re important because China and Japan are the world’s second- and third-largest economies, and both are faltering. The outlooks in both countries could continue to have a big impact on stocks around the world as Chinese and Japanese policymakers try to stimulate their economies.
Mutual fund manager Kenneth Lowe acknowledges that China’s growth and Japan’s inflation are key numbers to watch. But he’s taking a deeper look. As the co-manager of five-star rated Matthews Asian Growth & Income (MACSX), he knows that stimulus measures can juice an economy in the short term. But quarterly GDP or inflation figures don’t reveal much about the long-term outlook.
In Japan, for example, “We don’t just need a change in attitude when it comes to inflation and monetary policy,” Lowe says. “Structural reforms are needed to create sustainable growth.”
Japanese Prime Minister Shinzo Abe is trying to break a long bout of deflation by getting prices on an upward track. The government has targeted a 2 percent inflation rate, a far cry from the latest reported rate of 0.9 percent deflation.
Abe’s monetary stimulus campaign has fueled a market rally and Japan’s main stock index has climbed to nearly a five-year high. Mutual funds specializing in Japanese stocks have returned 27 percent this year, on average, more than double the next-best international fund category, according to financial research firm Morningstar.
The challenge is much different for the political leaders who recently came to power in China, led by President Xi Jinping. The Chinese economy continues to grow, but at its slowest pace since emerging from the 2008 global financial crisis. GDP — the economy’s total output of goods and services — expanded at a 7.7 percent annual rate in the first three months of this year. Although that’s far above the U.S. growth rate, it’s down from the previous quarter’s 7.9 percent, and a sharp pullback from the double-digit rates of the past decade. Recent data have been mixed, raising doubts about China’s ability to climb out of its slump.
Lowe, a longtime Asian investing specialist who’s also lead manager of the newly launched Matthews Asia Focus fund (MAFSX), discussed his outlook in an interview this week:
Q: What’s your take on Japan’s massive stimulus program?
A: It’s aggressive not just in terms of rhetoric, but in action. That’s something we haven’t seen in Japan during two decades of economic stagnation.
Q: Are there key issues that the program doesn’t address?
A: The need for fundamental economic reform, which is arguably more important than monetary and fiscal changes. Japan’s economic weakness has been in large part due to demographics, with its shrinking working-age population. That challenge will remain, so it’s very important for Japan to take steps to make it easier to do business, both domestically and with trading partners. For example, Japan could encourage a trans-Pacific partnership with the rest of Asia and the U.S. to make it easier to do cross-border trading. But we don’t have much clarity on what reforms will be made in Japan.
Q: What are some other steps Japan could take?
A: There needs to be a shift in the mentality of the Japanese consumer to encourage greater spending, and wages need to rise to help bring that about. We’ve recently had a couple instances where companies increased wages around 2 percent. ... But it’s difficult to say whether it will be sustainable ...
Q: Is Japan’s goal of a 2 percent inflation rate within two years attainable?
A: It’s an aspirational target. But even if it isn’t reached, anything is better than deflation. If they get halfway there, to 1 percent, and there’s a change in inflation expectations, it would be positive for the economy.
Q: Do your China growth expectations affect your investment approach?
A: They don’t, really. Historically, high growth rates in China haven’t necessarily resulted in strong investment returns, and that’s not specific just to China. But there can be good opportunities, even if growth slows to 6 percent.