Why wage growth in Japan supports Sony and Softbank

Market Realist

Dan Loeb’s Third Point Japan strategy is poised for perfection (Part 2 of 9)

(Continued from Part 1)

Great expectations for 2014

The below graph reflects the gloomy history of wage growth in Japan. While wage growth has made it into positive territory over the past year, the predominantly negative growth in real disposable personal income since 2005 shows Japan’s weak economy post-2008. This weakness in wage growth stands in stark contrast to the comparative wage hyperinflation in China, as we described in a prior series on China, China’s exports: Is the golden age of cheap labor coming to an end?. Regardless of this lackluster past performance, expected growth in wages in Japan for 2014 should continue to support Japanese equities in general, to include consumer products maker Sony.

On the road to recovery

Japanese unions manage to negotiate a 2.1% average growth in wages for 2014—the first since the 2008 crisis. With record corporate profitability in Japan, perhaps the raise was long overdue. This could be a major victory for Japan’s newest Prime Minister, Shinzo Abe, as he has sought to make good on his mandate to improve the lives of Japanese workers. Plus, through aggressive monetary and fiscal policy, Abe, in conjunction with Japan’s central bank, has sought to exit deflation and achieve a 2.0% inflation target. Given the slated wage growth for 2014, Abe has scored big on wages and hit his goal. As the above graph reflects, the growth in the trade deficit could reinforce these inflationary pressures in Japan. While skeptics focus on the near-term negatives of import price tag shock, long-term constructive views can find support in these reflationary wage gains.

Watch the dollar versus the yen

The key barometer of these reflationary developments will be the Japanese yen. Should Japanese domestic investors become convinced that inflationary pressures will take root and continue to grow, a significant landslide in selling yen to buy dollar-denominated assets could gather momentum. This would be a watershed event for post-1990 Japan. While Japan’s Yen has seen three 20%-plus weakening bouts since 1997, the post-2012 yen weakening stretch of over 30% is large, and given the monetary and fiscal measures noted above, could prove to be the largest and longest sustained period of yen weakening in decades. These developments should continue to support Sony’s share price as well as Third Point’s investment in Sony.

To see how Japanese consumers have finally picked up their consumption levels, supporting corporate profits, please see the next article in this series.

For an overview of the April 1 Bank of Japan Beige Book on Japan’s economic outlook, please see The Bank of Japan Tankan supports a 2014 Japanese equity rally.

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). 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 3

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