Making 'Abenomics' work
Miyuki Kashima, BNY Mellon Japan
“I am more bullish than at any other point in 20 years of managing Japanese equities,” says Miyuki Kashima, head of Japanese equity investments at BNY Mellon Japan, as she assesses economic reforms made by Abe. “The single biggest threat to the Japanese economy is if anything were to change in government due to Abe’s health or anything like that, it would be a complete disaster for Japan.
One of the many balancing acts Abe now has to play is one where he combats deflation without harming Japan’s fragile but recovering employment market. Abe has implemented a rise in consumption tax – the first rise since 1997 – in April this year. Kashima said things are different this time around and, importantly, this shouldn’t affect the employment market. The tax had an immediate impact on consumer prices, which shot up for the fastest rate in 22 years in April, as consumers rushed to make purchases before the tax kicked in.
Often overlooked among the raft of measures that fall under ‘Abenomics’, greater attention is now being paid to Japan’s employment statistics – not only in the percentage of people working but how they are employed. One of the many contributors to the country’s deflationary legacy, those people working under part-time or temporary contracts have historically been reluctant to spend, Kashima says. “Some large companies have announced they are going to be turning part-time employees into permanent, full-time members of staff – can you imagine the effect this will have on those people? They will now have confidence to buy cars, get a mortgage, and consume. This is how you get the economy moving again.”
Indeed, some industries are suffering staff shortages and as a result several large companies are shifting a significant portion of their contract staff to permanent. A recent Nikkei survey of 1,962 companies (Nikkei Newspaper April 20) shows new university graduate hiring will increase16% for the next financial year starting March 2015.
Companies committing to employing full-time staff is a good start but Japan has an employment culture which could also be about to change in other ways, according to Kashima. “In addition to the initiative to get more women to increase participation in the workforce both in terms of numbers and hours/level of work by increasing child day care availability and ‘guiding’ large companies to promote competent women – and have at least one women director on the board – the next set of reforms will likely include immigration policy.
“There are industries suffering from acute personnel shortages, and cannot be alleviated through the promotion of women, as this will take some time. Not an outright open door policy, and will only happen in steps but the time is ripe for discussion. This is important because over the very long term Japan will have to deal with the problem of declining population.”
Another type of reform that could also play a part in the employment market in Japan is the rules by which companies must abide. For example, it has always been very difficult for a company to fire an underperforming employee. While changed to employment rules and culture could evolve in the near future, Kashima doesn’t expect to see immediate results. “This will probably be of less focus this year, as the more immediate problem is more one of a labour shortage, rather than the question of whether companies will be more willing to hire if there they have more freedom to let people go later.”
Abe’s been given a full mandate to turn the economy around, according to Kashima. “It’s a rare period of political stability,” she says. “Over the past two decades, we’ve suffered deflation. This has made people and businesses very reluctant to spend, let alone take out loans to buy something which will be cheaper next year.
“Abe’s reforms are specifically aimed at targeting inflation. We are now facing a scenario not seen in two decades, where prices are going up. This is not only the prices of goods and services, but people’s wages are also going up. This is a big confidence booster,” she adds.
Outlook: weightings to Japan can only go one way
Opponents of Abe within Japan are resorting to increasingly political attacks but this will not halt Abe’s reforms, according to Kashima. “Critics may have been fuelled by increasing tensions with China over disputed islands, but this is something that has been around for many years. Some people are accusing him of being a right winger but it’s not true. He’s probably more central than people realise. Both sides have nothing to gain from any kind of real increased tensions. I don’t believe this is an issue. Abe is focused on economic reforms.”
Abe’s reforms could be about to make a meaningful impact on Japan’s ravaged stock market as well. “Earnings have gone back up to the levels they were in in 2006 and 2007 but the stock market has lagged significantly, so they will catch up eventually as well. This disconnect is where we see a big opportunity for investing in Japan today.
“Why wait until the gap has narrowed? We think that with inflation now a reality, GDP figures will improve and we could see some good results with some of the companies we invest in. Meanwhile, global investors are underweight Japan. If the economy picks up as I think it will, this can only go one way.”