Why Japan’s growing consumerism supports Third Point’s Sony stake
Dan Loeb’s Third Point Japan strategy is poised for perfection (Part 5 of 9)
Consumerism on the rise in Japan
The below graph reflects Japan’s progress in becoming a U.S.-style consumer-driven economy. While the 2008 financial crisis slowed the growth of consumption in Japan, consumption as a percentage of Japan’s gross domestic product (GDP) has recovered and is significantly higher than a decade ago, at just over 61% of GDP. Despite a lack of both real GDP and real disposable income growth since 2005, Japan has managed to grow the consumption portion of its overall economy. Looking forward in 2014, growing wages, tight production levels, and revering economic growth should support consumption gains in Japan, which will be positive for Japanese electronics exporters such as Third Point’s Sony and Softbank.
For more detailed analysis of the overall Japanese economy, please see The Bank of Japan Tankan supports a 2014 Japanese equity rally.
Abenomics: How aggressive fiscal and monetary policy support Third Point’s Sony
Japan’s new Prime Minister, Shinzo Abe, in conjunction with Bank of Japan Governor Haruhiko Kuroda, has succeeded in killing deflation and is pushing forward with current measures to achieve a 2.0% inflation target in Japan. Since taking office, these policies have raised Japan’s core inflation level from -0.5% to +1.3% per annum—well on their way to the central Bank’s 2.0% target. These policies, known as “Abenomics,” will attempt to encourage private investment through a more aggressive mix of monetary and fiscal policy. Abenomics aims to end deflation by targeting a 2% rate of inflation as well as increasing fiscal spending by 2% of gross domestic product (GDP).
Abenomics
Abenomics seeks to address Japan’s shortage of demand vis-à-vis supply by growing inflation, while Reaganomics sought to address an apparent shortage of supply vis-à-vis demand by shrinking inflation. While these approaches are somewhat opposites of one another, this is because the economies embody the opposite problems—inflationary versus deflationary environments. However, if Abenomics works through stimulating demand and consumption via credible inflationary scare tactics, this could in fact lead to a significant increase in Japan’s personal consumption relative to GDP, as reflected in the above graph. This is good news for Japanese manufacturers like Sony.
A Reagan Era for Japan?
It’s possible that Abe and Kuroda—like Reagan and Volker in the U.S.—could usher in a new phase of consumerism in Japan, with consumer credit in Japan rising from the current 6% of GDP level, toward an 18% of GDP level, as in the USA. Japan has a long way to go in this regard, and we would need to see significant changes in both wage growth, and expected future wage growth before Mrs. Watanabe applies for more credit cards. However, stoking inflation is a step in that direction, and as they say in Japan, “Even a journey of a thousand miles begins with one step” (Senri-mo, Iippo-kara). Good luck, Mr. Abe (Gambatte, Abe-san)! Dan Loeb applauds you.
To see how the Abenomics deficit spending fuels corporate profits for companies like Sony and Softbank, 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).
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