Japan's economic report card is going to be downright ugly. Investors needn't worry: Extra tutoring sessions are available in case this student really falters.
A 7.1% annualized decline is what economists polled by The Wall Street Journal expect when government GDP figures come out Wednesday for the quarter ended June. That would be the worst performance since the aftermath of the global financial crisis in 2009, and a challenge to Prime Minister Shinzo Abe's economic reboot.
The culprit is Japan's consumption tax, which was raised to 8% from 5% on April 1. A decline in spending following the increase is no surprise. More important is whether the economy is on track to bounce back from the shock.
Investors could be forgiven for losing some faith in Japan's renaissance. Consumer spending is recovering slowly. After plummeting 8.2% from the previous month in April, a key government measure of total private consumption inched up 1.5% and 0.7% in May and June. Indicators of supply-side activity have been more worrisome. Core machinery orders, a leading indicator for investment activity, fell 19.5% from a month earlier in May, and industrial production fell 3.3% in June.
The good news for investors: If the data keeps disappointing, the specter of further monetary easing by the Bank of Japan will rise again. The central bank is focused on reaching its 2% inflation target, not on growth, but it is hard to see how it can get there if the economy falters. The pace of inflation slowed in both May and June, when the core consumer-price index was up 1.3% from a year earlier after stripping out the effect of the consumption-tax increase.
And importantly for investors, stock-market valuations are undemanding, with the broad Topix index trading at just 13.8 times forward earnings, according to Nomura, a discount to the S&P 500 in the U.S. at 15.2 times. On earnings, Japan has historically traded at a premium to the U.S.
There's no rush to jump ship at prices like that, especially when help from the BOJ may be on the way.