In 2012, Japan launched “Abenomics”, a stimulus programme based on massive money printing, more state spending and gradual structural reform. The data since then has been patchy, but in the past few weeks surveys have fuelled hope of a decisive break from years of deflationary stagnation.
One encouraging figure is the first increase in core inflation in over a year. This gauge, headline consumer price inflation minus volatile food prices, is the one the Bank of Japan is aiming to propel towards its 2% target. In the 12 months to the end of January 2017, it rose by 0.1%. Then there’s the tightening labour market. In January the share of women willing to work hit another record high. The unemployment rate hasn’t been this low – around 3% – since the mid-1990s.
What’s more, as Capital Economics points out, wages are climbing at an annual pace of almost 1%, their fastest pace in 20 years. Over the past few months, part-time wages have gained the most since 2009. Higher earnings bode well for consumption. Capital spending climbed by almost 4% year-on-year in the fourth quarter of 2016, while corporate and household debt are on the rise again from a very low base. Furthermore, while the Bank of Japan is unlikely now to up the pace of its money-printing programme, it will be wary of withdrawing support too soon, so monetary policy will stay very loose.
Another hopeful sign is the small-cap comeback, adds Peter Tasker in the Nikkei Asian Review. In February, the Nikkei Jasdaq Index, the Japanese equivalent of America’s Nasdaq, hit a new record in dollar terms. “This may not seem like a big deal until you consider how long it took to chalk up the new record,” says Tasker. “The previous peak was in 1990, at the height of Japan’s frenzied bubble economy.”
This is especially auspicious for two reasons. Small companies “are more representative of domestic conditions”: 70% of the labour force works for a firm with fewer than 300 employees. So the upswing in small-caps is a sign of mounting confidence in the domestic environment. It’s also interesting to note that small caps “can be leading indicators”: the Jasdaq hit bottom in 1998, ten years before the Nikkei 225.
In addition to all this, as we regularly point out, Japan is undergoing a corporate governance revolution that is leading to higher dividend payouts, while company buybacks, and equity purchases by the government pension fund and the Bank of Japan, are further bullish factors. And with 40% of Japan’s stocks below book value, concludes MoneyWeek contributor Tim Price of Price Value Partners, Japan is an “extraordinary investment environment”.