Japan’s trade deficit surged to a record high in January underscoring the grim outlook for the world’s third largest economy. However, equity strategists believe the weak economic data will compel the Bank of Japan to further expand its asset purchase program, offering a boost to the country’s undervalued stocks.
“This trade deficit is a very good thing, it provides a lot of excuses and a lot of reasons for the Bank of Japan and the Ministry of Finance to come in with new policies and different ideas of what they are going to do with the economy,” Glen Wood, Partner & Head of Sales of equity research firm, Ji Asia, told CNBC.
Japan on Monday reported a worse-than-expected trade deficit of 1.475 trillion yen ($18.59 billion), more than 50 percent larger than the previous record of a 967.9 billion yen deficit seen in January 2009 during the midst of the global financial crisis.
Analysts say this a clear call for further stimulus by the BOJ, which unexpectedly expanded its asset purchase programby 10 trillion yen last week as part of efforts to weaken the yen and beat deflation. Since the announcement, the yen has fallen over 2.5 percent against the dollar and continues to hover near multi-month lows against other major currencies.
“(A weaker yen) is great for exporters and the whole investment in Japan theme and I think you are going to see capital shift back into Japan,” said Wood.
Market watchers expect further asset purchases by the BOJ, which will push the yen further down against the dollar in weeks to come, thereby benefiting the country’s exporter stocks that have been hard hit by the strength of the currency.
"At the end of the day if this weakness of the yen is engineered correctly, I think it’s the broad Japanese market that would actually have a substantial rally,” Clay Carter, Head of International Equities, Perennial Investment Partners, said.
Marc Faber, editor of the Gloom Boom & Doom Report, told CNBC last week that Japan was his favorite equity market based on the yen weakening past key levels against the dollar.
“I think there's a good chance that Japanese stocks will surprise on the upside," Faber said.
John Vail, Chief Global Strategist, Nikko Asset Management added, "We are overweight on Japanese equities for the next to 3-6 months, valuations are extremely low. Things are looking quite good in Japan right now especially as the yen is weakening."
While exporters are likely to be the main beneficiary of weakness in the Japanese currency, Wood says cyclical stocks in the shipping and steel sectors also look attractive on the back of an improving outlook for the U.S. economy.
“The yen sensitive sectors are obviously moving the fastest, but on top of that you will get tailwinds coming from U.S. (economic data) – that’s great for some of the cyclicals,” Wood said.