The rally in Japanese equities since the beginning of the year might be taken as a sign that the Japanese economy is in good shape.
But that’s actually not really the case.
Household spending in January saw its biggest year-on-year drop in 35 months — 6.3% — according to internal affairs ministry data released Friday, with this being the 11th straight month of declines. Meanwhile, the pace of wage hikes has been unable to keep up with inflation for nearly two years.
On top of that, preliminary government data last month also showed that gross domestic product shrank an annualized 0.4% in the October-December period. Although the figure could be revised up, that marked two consecutive quarters of contraction, which is considered a technical recession.
With a stock market boom and a macroeconomic slump happening at the same time, it’s natural to ask how that could be possible.
Simply put, Japanese stocks are performing well because companies are enjoying strong earnings and bolstering returns to shareholders, but the economy is slumping because companies are not sufficiently raising wages for their employees and thereby stimulating consumption, according to an economist.
“I believe the growth rate of the Japanese economy will likely remain stagnant for the foreseeable future. But as for stock prices, my view is positive. I think the recent record highs are just a passing point,” Shunsuke Kobayashi, chief economist at Mizuho Securities, said during a seminar last month.
The benchmark 225-issue Nikkei average has surged at an unexpected pace of about 20% this year to top the all-time high of 38,915.87 that was recorded during the bubble era in 1989. It subsequently rose above the 40,000 level for the first time, although it has fallen back in recent days.
A number of market watchers have said that the impressive performance of Japanese stocks is not a rerun of the stock-buying frenzy of the late 1980s bubble, as this time it is based on domestic firms’ strong earnings.
According to an SMBC Nikko Securities tally, the combined net profits of major Japanese firms listed on the Tokyo Stock Exchange — many on its Prime section — are expected to mark a record high of ¥47 trillion ($317.7 billion) for the 12 months through March, which would be the third straight fiscal year they would have done so.
Also, the weakening of the yen — mainly stemming from the wide gap in interest rates between Japan and the U.S. — has been favorable for Japanese shares. A weak yen is generally a plus for the overall performance of Japanese stocks, since it prop up the profits of exporters.
Although Japanese companies have seen steady increases in profits, workers are not really getting paid enough, so consumption has remained frail, Kobayashi pointed out.
In 2023, nominal GDP, which largely reflects companies’ gross profits, rose 5.7%, but the total nominal compensation of employees only grew 1.8%.
Even though momentum over wage hikes has been gaining steam over the past year in response to price hikes, wage growth is still not keeping up with inflation, and that is consequently hindering consumption.
Labor ministry data released Thursday showed that in January real wages fell 0.6% year on year, marking the 22nd straight month of decline.
On top of that, the economic boost from the unleashing of pent-up spending following the pandemic seems to have ended already, Kobayashi said.
“In that case, Japan needs to have another growth driver other than the impact of resuming economic activities,” he said, adding that will be difficult to find for now, since real wage growth is not expected to exceed inflation until next year.
For this year’s spring labor union negotiations, known as shuntō, Japan's largest labor organization Rengo set a total pay hike target of 5% or more, including a 3% or more increase in base salaries.
But given that the inflation rate for this fiscal year is expected to be nearly 3%, that base salary hike demand is too low, Kobayashi said, adding that labor unions need to make bolder demands to realize more substantial wage increases.
While Japanese companies have not been spending so much on wage hikes, they have been directing their bumper profits elsewhere.
Kobayashi pointed out that they have been investing in foreign firms to secure growth opportunities, as well as beefing up shareholder returns through increased dividends and stock buybacks.
According to Bloomberg, share buybacks by Japanese firms this fiscal year already reached a record high of ¥9.7 trillion as of Feb. 19, topping last fiscal year’s ¥8.9 trillion.
As companies have been facing stronger pressure from both the government and the TSE to deliver more on shareholder returns, “stock prices will likely continue to climb, but it will still take a while to fire up a robust cycle of domestic demand” led by wage hikes and consumption, Kobayashi said.
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