Japan, the third largest economy in the world, has been facing a steady recession period for quite some time now. The Gross Domestic Product has shrunk considerably in successive quarters, the Yen has recorded a seven year low against the dollar and the infrastructure capacity has seen a massive financing deficit. While many believe that this recession is short lived, there is no doubt the country’s recession would have a direct impact on India as well as the rest of the world.
India enjoys an economic partnership agreement with Japan. However, the recent years have seen a drop in the bilateral trade between the countries, with the currencies of both countries falling against the dollar. Japan’s private foreign direct investment in India has been around $15-16 billion since 2000. Indian Prime Minister Narendra Modi’s recent visit to Japans saw a mutual agreement that would see FDI commitments between the two countries rise to over $35 billion in the next few years.
The weak yen would lead to more Japanese exports reaching Indian shores and abroad. With the yen expected to remain week for more period, one would expect Japan to switch to options like borrowing in yen and buying in other currencies. This carry trade option would facilitate the increased flow of money into manifold Indian equities and assets. And with Indian markets valued higher than the fundamentals, any foreign investor who is interested in the yen carry trade can touch ground in India. Despite the recession faced by many other countries, India has a market that has high growth rates and can easily absorb large investments.
India has also enjoyed a prosperous economy, including lower inflation and higher GDP growth than other countries reeling in recession over the past few years. With 2015 poised to be better, Japan’s QE expansion could help keep Indian stock markets afloat.
One would also need to consider Japan’s asset allocation patterns here. With the country seeing zero to near-zero interest rates for a long time now, it would only be considered wise to increase consumption and shift from debt to equity based asset allocation.
However, Japan’s large retiree population prefers to remain debt oriented in their household saving patterns without increasing consumption. In spite of a stock market recovery, very few individuals take the step forward to invest in equity. The stagnant nature of the nation’s stock market in the last 20 years can be attributed to this permanent aversion.
An interesting thing here is that in spite of having different economic conditions than Japan, India follows a similar pattern as Japan in its equity based asset allocation plans. India’s stock market may be performing well, but the rampant scandals and scams in the market have made many retail investors equity averse.
Japan’s receding economy may have direct and indirect implications on India as well as the entire world. While a shift from debt based to equity based asset allocation is predicted, many wonder whether the two equity averse countries will change their minds and opt to make hay while the sun shines.