Jesper Koll is a Managing Director and Head of Research at JP Morgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.
Forecasting the economic fortunes of nations is a bit like forecasting the weather. Sooner or later fortunes will change, pushed along by a natural cycle. No matter how miserable and freezing, eventually winter will give way to spring and summer. So let’s be bold and forecast the return of strong economic growth to Japan this year.
And no, I am not just talking about a strong export-led recovery. Domestic demand is where it’ll be at this year. Signs are good that—for the first time in over six years—a full-fledged domestic demand recovery could be underway. Yokoso domestic growth!
Call me an optimist, but please hear me out. The dynamics of home-grown demand are powered by the following force: The purchasing power of people that is rising and poised to rise even more in coming months, in my view. Why?
Yes, wages in Japan are now rising. This year’s “shunto” spring wage negotiations resulted in a 1.7 percent increase in base pay, starting April 1. This is solid evidence that the recovery in corporate activity and profits is actually feeding through into better pay for the workers of Japan Inc.
Don’t underestimate how strong the rise in workers’ real spending power actually is. Given that consumer prices are still dropping by more than one percent, the real purchasing power of the people is actually rising by over 3 percent now. That is not just the highest growth in over a decade here in Japan, but also the highest increase in workers’ effective wallet amongst all advanced industrial economies. Make no mistake—Mr. & Mrs. Watanabe are back on top.
The good news is that Japan’s wage and income dynamics are poised to get even better from here. Just as spring follows winter, workers’ bonus pay follows corporate profits. With corporate profitability up a full 40 percent from the bottom recorded one year ago, summer bonus pay is likely set to be up by about 10-15 percent. That’s what past sensitivity analysis suggests and, in my view, there is no reason to expect that this time around corporate managers will be less forthcoming in sharing corporate fortunes with their employee stakeholders.
The current political mood and social mores suggest that the leaders of Japan Inc. are more likely to want to be seen as giving back more to workers, rather than less. The current ruling party and its labor union revival dynamics suggest as much, in my view.
Another direct boost to consumers’ wallets come from government policy. Make no mistake—the Democrats’ child support policy is poised to do more for spending than currently anticipated. Remember, households will get 13,000 yen per month, per child this year. On top of that, high school tuition will be free. Add it all up and you get a 1 percent boost in disposable incomes.
Importantly, the government decided not to cut back on child tax deduction allowances this year. In other words, slightly more than one-third of all households (i.e., those with kids under age 15 or kids in high school) will get a boost to their purchasing power from government transfers, and the remaining two-thirds will see no tax hike. To be sure, next year, 2011, the child tax deductions will be tightened, but also the monthly allowance will be doubled, so next year we’ll get a bit of “step on the brake while also stepping on the accelerator” policy. However, for 2010 there is no such confusion—it’s pure and simple “pedal to the metal” policy support for consumer spending.
Pages: 1 2
