What's NewApril data confirms wages in Japan are on the rise

April wage data confirmed our view that wages in Japan are finally on the rise. The preliminary estimate for the month showed that regular wages in Japan rose by 1.2% year on year (YoY) in April, continuing to rise at the highest rate of increase since July 1997. There have been a few false dawns for wage inflation, but the current upturn seems to be the real one, in our view. (June 6th, 2018)

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Wages in Japan is finally on the rise. According to the preliminary wage report for March 2018, regular wages in Japan rose by 1.3% year on year (YoY), the highest pace of increase in 21 years. Japanese companies are also hiring more full-time workers than part-time workers. There have been a few false dawns for a wage inflation in Japan, but there is a high chance that the current pick up is a real change in the Japanese labor market.

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BoJ made an important change to its policy statement on April 27 by dropping the specific mention for when the bank expects to achieve its inflation target. The change may have been a sound decision, as the failure to achieve the target has been hurting the credibility of the BoJ. However, Governor Kuroda showed poor judgment by downplaying the significance of the change. In the press conference, he repeatedly said the BoJ never intended to impress upon the public when the bank expects to achieve the target and it was all misunderstanding by the financial market. That is a lie as the BoJ's published statement clearly shows. These miscommunication further undermines the credibility of the BoJ, eroding the effectiveness of its monetary policy. There has been a rumor that the BoJ may be about to taper its ETF purchase and the demeanor from Governor Kuroda suggests that the rumor may be true, however emphatically he denies it. After all the deception, who can believe a word he says?

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For years, ROE among Japanese companies languished in low single digits. No more. The average ROE rose to 9.1% in the fiscal year 2017, clearing the 8% "minimum" target set by the influential government-commissioned Ito Report published in 2014. The Japanese companies managed to raise their ROE not through financial leverage but through higher ROA and fatter profit margin. We find it remarkable that non-manufacturers, long considered an inefficient part of Japan Inc. are enjoying an unprecedented level of ROA in recent years. In our view, the rise in ROE is combined results of the cyclical upturn in the economy and the improvements in the corporate governance in Japan.

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After the landslide electoral victory in 2017, it looked certain that Prime Minister Abe would stay on for a few more years. A new development in a year-old cronyism scandal raises a possibility that he may not survive 2018 as Japan's Prime Minister. A leadership election for his ruling party, LDP, is scheduled this September and there is a chance he would be persuaded not to run. Mr. Abe may stay on as a kingmaker, but a fresh face at the top seat of the government will likely bring substantial changes to the policy mix in Japan. In our view, the changes are likely to take the direction toward fiscal consolidation and more conservative monetary policies.

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Until recently, foreign workers were not of macroeconomic concern as the number was too small. As it now accounts for 2% of the total workforce and growing nearly 20% per year, it could soon start to have a meaningful economic impact on Japan's labor market, consumption and most importantly, on the longer-term growth outlook for Japan.

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