Why consumer credit gains support Third Point’s Sony and Softbank

Market Realist

Dan Loeb’s Third Point Japan strategy is poised for perfection (Part 4 of 9)

(Continued from Part 3)

Consumers spend and borrow more in Japan 

The below graph reflects strong growth in consumer credit in Japan. Over the past two years, consumer credit balances have grown about 11.0%. That’s not a bad growth rate for a country whose real gross domestic product, GDP, output rate is still stuck at 2005 levels. Given that Japan’s GDP is roughly 500 trillion yen, 33 trillion yen (330 billion US dollars) in outstanding consumer credit represents 6.6% of Japan’s GDP. In comparison, the U.S. Federal Reserve Bank notes 2.8 trillion U.S. dollars on a 2013 GDP of 15.7 trillion U.S. dollars, or about 18% of U.S. GDP. Given that Japan appears to be recovering from the post-2008 crisis and wage gains are slated for 2014, it would seem that Japan’s consumer credit levels have considerable room to grow as the year progresses. This should support the retail sales of retail electronics manufacturers such as Third Point’s Sony and Softbank.

To learn more about the background of Japan’s consumer credit market, please note the below commentary.

To see how consumerism is showing significant growth in Japan, please see the next article in this series.

A brief history of the politics of consumer credit in Japan

The introduction of the 2010 Money Lending Business Law in June 2010 caused a significant decline in Japan Consumer Credit, as these laws cut allowable interest rates from 29.2% to 20.0%, and limited loans to one third of a borrowers annual income. This drove one of the big four consumer lending companies, Takefuji, into bankruptcy by September of 2010, three months after enactment. These laws were enacted as Japan’s national police agency had reported that financial problem–related suicides had reached 9,000 per year.

Consumer credit: Regulatory review in a new political regime

This change in consumer credit policy came about as Japan’s long-time ruling party, the Liberal Democratic Party (LDP), had lost the August 2009 election to the Democratic Party of Japan (DP). This transition of political power occurred in the wake of the global financial crisis. The economic problems of the Japanese public have intensified during this time, and predatory lenders were facing harsh scrutiny under the new regime. New guard leader Minister Hatoyama was succeeded by two more new-guard Democratic Party prime ministers (Naoto Kan and Yoshihiko Noda) prior to the November 2012 elections, which once again brought the Prime Minister title back to the old-guard LDP, headed by the current Prime Minister, Shinzo Abe.

Politics come full circle: The old guard is back and is more pro-business

Note that current Prime Minister Shinzo Abe had been Japan’s Prime Minister from September 2006 through September 2007, having succeeded LDP Prime Minister Junichiro Koizumi, who had served as LDP Prime Minister from April 2001 through September 2006—an astounding five and a half years. So, politically, we could see that the Japanese political leadership has come full circle post–2008 crisis: the LDP’s Abe is once again picking up where he and his LDP predecessor, Junichiro Koizumi, had left off back in 2007, when Japan and other global economies were doing very well.

Subsequent LDP ministers Fukuda and Aso had simply fumbled the ball after Abe resigned in 2007 (apparently related to low approval ratings in the wake of suicide and financial scandals at the Ministry of Agriculture). Plus, the decline of the global financial system was just starting to take hold after Abe resigned in 2007, only to be replaced by two old-guard 12-month LDP pinch hitters (Fukuda and Aso). The subsequent yet ephemeral rise of the Democratic Party (DP) of Japan under Hatoyama, Kan, and Noda from September 2009 to December 2012 might have been the product of the global crisis, which seems to have waned in sync with the Democratic Party (perhaps the USA exhibited a similar pattern, as the U.S. Presidency shifted from Bush to Obama).

Back to business

With the global financial crisis under control, the Liberal Democratic (or LDP) party of Japan is back in the driver’s seat and is once again being headed by Shinzo Abe as Prime Minister. Given the historical clout of the LDP party in Japan, it would be hard to imagine that the prior ruling party, the Democratic Party (DP), under Hatoyama, would have been able to gain support and implement their version of Abenomics (Nodanomics, Kanonomics, or Hatoyamanomics).

As such, Prime Minister Abe’s party, the LDP, is seeking to roll back the provisions of the 2010 Money Lending Business Law. Bloomberg news reports “Loan-Shark lending Surge Feared in Japan,” as of August last year, while the LDP party’s Masaaki Taira, a prior business owner and entrepreneur, continues to push forward with the agenda to scrap the recently implemented law. With Abenomics set to deliver economic growth, higher wages, and possibly inflation, perhaps it’s easier for individuals and small businesses to borrow at 30% APR instead of the low rate of a mere 20% APR. (Somehow, we doubt that inflation expectations are that high just yet.)

Conclusion: Easing credit supports Sony

Though it’s not clear if or when the new credit rules have resulted in a repeal of the prior June 2010 Order for Enforcement of the Money Lending Act, it would appear that the current political winds of Abenomics support consumer credit liberalization as wages grow and the economy recovers, supporting retail sales and Third Point’s Sony.

To see how consumerism is showing significant growth in Japan, please see the next article in this series.

Japan’s equity outlook

As 2014 progresses, investors could see a continued outperformance of the Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further clarification as to why DXJ could outperform both EWJ and other Asian equity indices, please see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics.” Plus, as Japan pursues unprecedented monetary expansion and the U.S. Fed tapers its bond purchases, Japanese equities could also outperform broad U.S. equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), the State Street Global Advisors Dow Jones Index SPDR (DIA), and the Blackrock iShares S&P 500 Index (IVV).

Continue to Part 5

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