What is the key investment message overnight? This is a dangerous time for Japan as the Abe Government needs to increase and broaden revenue sources to reduce its huge debt load, which is the highest for any advanced nation. It has to accomplish this as the population progressively ages and contracts in the next three decades and the consumption tax rise was by far the most efficient way of achieving this. The key problem for Japan at present is the lack of worker wages growth, which is an issue that is evident in all advanced economies, irrespective of their growth and debt levels. The large depreciation of the Yen in response to a massive expansion in the Japanese monetary base (or the Bank of Japan’s QE program) has increased profit margins and corporate earnings, which has sparked a near doubling of Japanese share prices over the past two years. However, this stimulus has come at a cost as the lower Yen has increased the price of imports and this acts like a tax on Japanese discretionary spending. Despite higher margins, Japanese corporations have not passed on any of their profit surge to workers, and wages growth (and inflation) remains very sluggish and well below the target of the BoJ. Households have adjusted to higher import prices by lowering their savings rate to zero, but it can’t go lower. Therefore unless wages growth starts to accelerate, Japanese GDP will be anchored to extremely low growth rates, at best, for the decade ahead. However, more worryingly the near-certain delay in the consumption tax hike leaves Japan’s biggest problem, namely how to stop and finance its ballooning debt, completely unresolved and markets will not want to live in ignorance for too much longer on this issue, one would assume. Regards, Matt Sherwood Head of Investment Markets Research
Posted on: Mon, 17 Nov 2014 23:10:18 +0000
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