Japan: Bridging the productivity gap

As Japanese society ages it will need to rely ever more on automation and new technology to bridge the productivity gap. That creates a requirement for robots to start taking on the jobs that people used to do. Employment data and labour force projections underline the point.

The Japanese jobs-to applicants ratio has soared while the unemployment rate has plummeted as the economy recovers from 20 years of stagnation and deflation during which the nominal GDP actually contracted.

Meanwhile, even though more women are entering the workforce, the number of people in work will plateau at best in the next decade. Together, the combination of a tight labour market and the structural trend of an ageing population create a real need for an automated future.

Miyuki Kashima – head of Japanese equity investments. BNY Mellon Japan

As Japanese society ages it will need to rely ever more on automation and new technology to bridge the productivity gap. That creates a requirement for robots to start taking on the jobs that people used to do. Employment data and labour force projections underline the point. The Japanese jobs-to applicants ratio has soared while the unemployment rate has plummeted … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Why the time is right to allocate to Japanese smaller caps

Japanese equities have been on a tear of late. The Topix  rose 20.7% for the 12 months between 31 January 2017 and 31 January 2018. Should the market continue to rise, history does seem to suggest the small cap section is a good place to be. An analysis of comparative returns on the small cap versus large cap sections of the Russell/Nomura Index from 1984 to 2017 suggests small caps outperformed in the vast majority of periods where markets rose.

The benefit of investing in Japanese small caps is also apparent when you consider the question of correlation. Investors who do so have the advantage of lower average correlations versus European, Asian ex-Japan, emerging and US indices. These low correlations are even more evident in small cap indices.

People often talk about alternatives when the question of diversification comes up but this aspect of exposure to Japanese equities is regularly overlooked. We’d argue investors looking for ways to diversify their portfolio would benefit from allocation to small cap Japanese stocks given their tendency to perform with relatively limited reference to the movements of wider global equity indices – an important consideration given the current market turmoil.

Miyuki Kashima – head of Japanese equity investments, BNY Mellon Japan

Japanese equities have been on a tear of late. The Topix  rose 20.7% for the 12 months between 31 January 2017 and 31 January 2018. Should the market continue to rise, history does seem to suggest the small cap section is a good place to be. An analysis of comparative returns on the small cap versus large cap sections of … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The comeback king: Shinzo Abe and Japan’s reinvigorated economy

Between 2006 and 2012, Japan had no less than seven prime ministers; more than one a year. November’s landslide election of Shinzo Abe for a record-breaking third term signals a decisive end to an era of political instability and bodes well for a reinvigorated economy.

Immediately after Abe’s recent victory , the Nikkei 225 hit a 21-year high, building on a run that saw Japanese equities comfortably outperform European and US stock markets since the start of September.

On the macroeconomic front, too, the picture looks rosy. Corporate profits and business sentiment are up. GDP has risen for seven quarters in a row, its longest spell of interrupted growth for 16 years. Nominal GDP was almost 11% higher in the third quarter of 2017 than it was five years earlier.  We see this spurt of growth as a major milestone. For the first time since 1997, nominal GDP is now above ¥533 trillion, meaning the economy has finally recovered the ground lost over two long decades of stagnation.

If you step back and look at what the government promised on the economy and what it has actually achieved since it launched fiscal and monetary stimulus in 2013, it’s pretty impressive. We think it points the way to a positive outlook for investors.

Miyuki Kashima – head of Japanese equity investment, BNY Mellon Japan

Between 2006 and 2012, Japan had no less than seven prime ministers; more than one a year. November’s landslide election of Shinzo Abe for a record-breaking third term signals a decisive end to an era of political instability and bodes well for a reinvigorated economy. Immediately after Abe’s recent victory , the Nikkei 225 hit a 21-year high, building on … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Population dynamics in action: Japan’s inconvenient truth

Abenomics was launched in late 2012 by Japanese Prime Minister Shinzo Abe and trumpeted a 2% per annum increase in consumer prices within 2 years. But the rate of increase in the Consumer Price Index (CPI) has been near 0% per annum over the past 12 months. Even excluding food and energy prices, the rate is currently only 0.5% per annum, while the growth in real GDP has averaged just 0.5% year-on-year for the past two years. In addition, export volumes have risen by less than 5% from their levels in 2012, despite the benefit of significant currency depreciation.

It seems to us that deflation is not, in itself, ‘the problem’, but rather a direct symptom of structural and societal factors affecting not just Japan, but most developed economies.  Japan’s demographic challenges are, however, particularly acute. It is hardly surprising that an economy that is seeing contraction in not just the working population, but also in the total population, is struggling to grow. This, allied with widespread domestic overcapacity (not to mention a global lack of pricing power), goes a long way to explaining why mild deflation has been an issue in Japan for two decades or so. Moreover, with relatively stagnant wage growth, some deflation in households’ costs has kept real incomes positive (in stark contrast to the US).

Abenomics, as originally conceived, may have been a reasonable idea: implement painful structural reforms, and offset the discomfort with loose fiscal and monetary policy. The problem is that, in practice, little structural reform has been achieved; monetary policy, via the Bank of Japan (BoJ), has been the main lever.

Iain Stewart – Newton, a BNY Mellon company

Abenomics was launched in late 2012 by Japanese Prime Minister Shinzo Abe and trumpeted a 2% per annum increase in consumer prices within 2 years. But the rate of increase in the Consumer Price Index (CPI) has been near 0% per annum over the past 12 months. Even excluding food and energy prices, the rate is currently only 0.5% per … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
What’s really going on with the Japanese economy?

One of Prime Minister Shinzo Abe’s initial economic arrows was aimed at pulling Japan out of deflation to move closer to the Bank of Japan’s 2% target. While that is yet to be achieved there are some encouraging on-the-ground indicators: Wages are going up as evidenced by the data on part-time workers. This is the first sector of the labour force to see wage increases because corporations are more reluctant to increase the compensation of full-time and permanent staff in the early stages of a recovery. Nevertheless, this demonstrates how much employers are willing to pay to attract the ‘marginal worker’, so the fact these pay packets have been expanding is a positive sign.

The inflation rate (CPI) minus energy and food is also close to 1%. We call this the ‘core core’ reading and I believe it is a more important metric to keep an eye on than CPI. Additionally, living in Tokyo, inflation feels higher still. The University of Tokyo Daily Price Project, which tracks daily point of sales data, currently shows a reading of around 1.5%, which feels much closer to reality. Abe has made an impressive start towards an inflationary environment; a commendable achievement against a global backdrop of prices under pressure.

Miyuki Kashima, BNY Mellon Japan

One of Prime Minister Shinzo Abe’s initial economic arrows was aimed at pulling Japan out of deflation to move closer to the Bank of Japan’s 2% target. While that is yet to be achieved there are some encouraging on-the-ground indicators: Wages are going up as evidenced by the data on part-time workers. This is the first sector of the labour … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Will Japan’s snap election cost it dear?

Prime Minister Shinzo Abe has postponed a consumption tax rise originally planned for October 2015, instead opting to call a snap election, but can Japan’s highly indebted government actually afford such a delay? The fiscal hawks worry about the implications for Japan’s public debt, which will amount to almost 230% of GDP by the end of this year, according to the OECD’s May projections. Such worries, however, seem premature. While the debt numbers may seem intimidating, Japan still finances these liabilities with surprising ease. This is partly because the government also owns substantial financial assets. So Japan’s net public debt will be a more manageable 143% of GDP by the end of this year, reckons the OECD. The debt burden is also surprisingly light because interest rates are remarkably low. Japan’s net interest payments will amount to only about 1% of GDP this year, the OECD calculates, which is lower than all but one of the other G7 countries.

 

Simon Cox, BNY Mellon Investment Management Asia Pacific

Prime Minister Shinzo Abe has postponed a consumption tax rise originally planned for October 2015, instead opting to call a snap election, but can Japan’s highly indebted government actually afford such a delay? The fiscal hawks worry about the implications for Japan’s public debt, which will amount to almost 230% of GDP by the end of this year, according to … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Abenomics: what’s left in the quiver?

Aggregate wage income

We believe the decline in real wages should prove temporary. If firms can charge higher prices without paying higher wages, their profits will increase. Fatter profits will encourage firms to expand their operations and tempt new rivals to enter the market. That in turn will increase hiring and, in time, bid up wages to match the higher prices. The reflection of Japan’s economy should be a prelude to higher real wages not a threat to them.
Miyuki Kashima, Head of Japanese Equity Investment, BNY Mellon Asset Management Japan

We believe the decline in real wages should prove temporary. If firms can charge higher prices without paying higher wages, their profits will increase. Fatter profits will encourage firms to expand their operations and tempt new rivals to enter the market. That in turn will increase hiring and, in time, bid up wages to match the higher prices. The reflection … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Taxing times for Japan

The consumption tax rise and why this time it’s different

In 1997 the Japanese government engaged in fiscal retrenchment and raised the consumption tax from 3% to 5%. Soon after the policy came into force, there was a recession and a sharp increase in Japan’s government debt-to-GDP ratio. Japan was about to enter a 15-year period of deflation – the timing was terrible. If only the underlying economy had been stronger, it might have been different.

But this time around we believe it is different. There is momentum behind the Japanese economy and there is significant political capital invested in the move by Prime Minister Shinzo Abe and his government. We expect it to work and we expect to see the positive effects of the tax rise in the coming quarters.

Miyuki Kashima, BNY Mellon Japan’s head of Japanese equity investments

 

In 1997 the Japanese government engaged in fiscal retrenchment and raised the consumption tax from 3% to 5%. Soon after the policy came into force, there was a recession and a sharp increase in Japan’s government debt-to-GDP ratio. Japan was about to enter a 15-year period of deflation – the timing was terrible. If only the underlying economy had been … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The beginning of a long-term recovery?

The recent political and economic turnaround in Japan is only the beginning of a long-term economic recovery. With unprecedented political will and support for reform firmly in place, Japan is at a major inflection point with the government and BoJ hell-bent on reversing the yen’s strength and deflation, the two major causes of 20 years of stagnation.

Miyuki Kashima, head of BNY Mellon Investment Management’s Japan equity team.

The recent political and economic turnaround in Japan is only the beginning of a long-term economic recovery. With unprecedented political will and support for reform firmly in place, Japan is at a major inflection point with the government and BoJ hell-bent on reversing the yen’s strength and deflation, the two major causes of 20 years of stagnation. Miyuki Kashima, head … read more

  • Download
  • Print
0 comments | Join the conversation, comment now