Page 14 - DIY Investor Magazine | Issue 39
P. 14

           Nov 2023 14
DIY Investor Magazine ·
Inflation is important. If companies can put through price increases, they can have confidence to increase wages. This translates into stronger purchasing power for households, leading to further increases in demand, which then leads to improving sales and profits for companies, and so on. It’s a virtuous circle, but one that has been missing in Japan for many years, forcing companies to focus on cutting costs instead of raising wages or otherwise investing in their businesses.
The cost of living in Japan looks relatively low according to popular measures such as the “Big Mac index” or the more recently introduced “Starbucks index”. Meanwhile, looking at minimum wage levels around the world, Japan sits among the lowest of the developed economies.
This suggests there is meaningful room for price and wage hikes should this virtuous cycle become established.
‘WE CONTINUE TO SEE A POSITIVE OUTLOOK FOR THE JAPANESE STOCK MARKET’
DEMOGRAPHICS MAY HELP WAGE GROWTH
As things stand, wages in Japan are already ticking higher, with positive wage growth for 19 consecutive months.
Recent data showed a rise of 2.9% year-on-year in May but smaller increases of 2.3% y/y for June and 1.3% y/y for July.
‘WE CAN BE VERY CONFIDENT IN THE LONG-TERM OUTLOOK’
That still leaves wage growth lagging behind inflation.
We do see reasons for wages to keep growing though. Corporate profits reached a new peak in the April-June quarter because companies were able to pass cost increases through into their selling prices.
That bodes well for future wage growth. Japan’s demographic challenges may also see employees gain more power in wage negotiations. Japan’s working age population is shrinking more rapidly than that of many other developed countries.
The Bank of Japan has said that “it seems highly likely that, if the economy continues to improve, competition over human resources will become more intense and wage growth will rise”.
POTENTIAL SUPER CYCLE FOR JAPAN TRIGGERED BY INFLATION
In a deflationary environment, cash is king, so Japanese households and corporations have tended to hold a lot of cash.
Although this has was rational during the era of deflation, the return of inflation means there is a “cost” to holding cash, and we foresee behavioural changes going forward.
Indeed, the Japanese government has made some interesting and bold changes to the tax-exempt “NISA” savings scheme which are designed to promote a broad shift from savings to investments.
       
















































































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