Earlier this week, the 1Q06 GDP report in Japan was revised. Several statistics noted in this Bloomberg article article discussing the report support my bull case on Japan.
GDP grew by a healthy 3.1% in 1Q06, revised upward from 1.9%. Corporate spending rose at its second fastest rate since 1990. Machinery orders were up almost 11%. Inventory investment rose sharply. Bank lending has risen for four straight months. These datapoints all indicate that corporate confidence in continuing GDP growth is high. Modestly improving consumer spending shows that consumer confidence also supports future growth.
As is the rest of the world, inflation is up in Japan….

The GDP report showed prices rising 3.3%. In the US and Europe, inflation is big worry for investors. Japan is not immune to inflation risks but given that the country experienced deflation for the most of the last 15 years, the pickup in consumer prices is less of a problem.
Lastly, I have to say I found the fact that the current economic expansion in Japan is the second longest in the country’s post-World War II history to be surprising. In fact, with GDP growth picking up to 3%, it has now reached its highest level in about nine years.
The bull case for Japanese stocks is if economic growth can hold at this new and higher level, operating leverage will kick in and drive corporate profit growth. Additionally, moving from deflation to inflation can help the Japanese economy as long as inflation does not accelerate too far. Put these two ideas together and the pickup in GDP growth can be self-fulfilling, extending the current recovery in GDP and putting it on plane that supports higher stock prices.