• Bloomberg


While Prime Minister Shinzo Abe’s policies help manufacturers such as Toyota Motor Corp. rack up record profits, challenges to his reforms are showing up in a more mundane spot: the outlook for beer.

Brewers in Japan face an April sales tax increase, stagnant wages and an aging population, the same challenges Abe’s monetary easing and stimulus spending must overcome to sustain a recovery.

Kirin Holdings Co., Japan’s biggest beverage maker, and competitor Asahi Group Holdings Ltd. forecast 2014 net income that was at least 13 percent less than analysts estimated. Both blamed the sales tax set to rise to 8 percent from 5 percent, a sign that they lack confidence that “Abenomics” will offset plans to double the levy.

“In the old days, beermakers relied on increasing sales as the economy grew,” said Mikihiko Yamato, deputy head of research at JI Asia in Tokyo. “Now, beer and liquor makers that target domestic consumers can’t raise profit margins because they are stuck competing in a shrinking market.”

Kirin, Asahi, Suntory Holdings Ltd. and Sapporo Holdings Ltd. gave investors the first glimpse of 2014 earnings for Japanese companies this week and last, when they reported 2013 results and gave projections for this year. The brewers report on a calendar basis, while most Japanese companies end their fiscal year in March and disclose a forecast in late April.

Earnings at consumer staples companies, from brewers to convenience store operators and toiletries makers, missed analyst estimates by the biggest aggregate margin among 10 groupings on the Topix index. The category’s aggregate negative surprise for earnings last quarter was 9.2 percent, compared with 5.8 percent for oil refiners, the only other industry that missed estimates, according to data compiled by Bloomberg.

Aggregate earnings for all companies outperformed analyst expectations last quarter, led by Toyota, which quadrupled quarterly net income and raised its full-year profit forecast to a record, data compiled by Bloomberg show.

Earnings per share were about 15 percent higher than average analyst estimates, the data show.

The benchmark Nikkei 225 average will jump to ¥18,000 by year’s end, compared with about ¥14,800 at the beginning of this week, according to the median forecast of 13 strategists and investors surveyed by Bloomberg News earlier this month.

Still, Asia’s second-biggest economy grew at less than half the forecast pace in the fourth quarter, underscoring risks to Japan’s recovery. Gross domestic product expanded an annualized 1 percent from the previous three-month period, according to the Cabinet Office, less than the median projection of 2.8 percent in a Bloomberg News survey of 37 economists.

The outlook for rising stocks, fueled by booming earnings at manufacturers, has left analysts and investors to question whether the gains can spread broadly enough among domestic businesses to last. The answer depends on whether Abe’s policy of doubling bond purchases and increasing stimulus spending while vowing structural reforms, pushes up wages on a pace with consumer prices.

“I have hopes for higher wages and resilient consumer spending,” Takuya Takahashi, senior strategist at Daiwa Securities Group Inc., said by phone. “I hope domestic consumption will rebound firmly July-September after falling April-June.”

Stagnating wages are one reason Japanese are drinking less beer, making breweries a bellwether for the kind of broader recovery Abenomics-watchers have yet to see.

Monthly wages excluding overtime and bonus payments fell 0.6 percent in December from a year earlier, extending a decline to 19 months, according to labor ministry data. The central bank projects consumer prices excluding fresh food will rise 1.9 percent in the 12 months starting on April 1, 2015, excluding the effects of a higher consumption levy.

Domestic shipments of regular, low-malt and alternative beers dropped 1 percent in 2013, a ninth straight yearly decline, industry data show. “We will start seeing the impact of the tax increase in July or August,” said Makoto Kikuchi, the Tokyo-based chief executive officer for Myojo Asset Management Co. “People will realize stimulus measures aren’t doing anything and the reality is tougher than they had expected.”

Abe has vowed to revive growth using policies described as three arrows: monetary easing, stimulus spending and deregulation including structural reforms. He’s yet to implement the third arrow, prompting speculation the coming year will reflect only the first two.

Brewers and consumer staples producers also face the prospect of a second planned tax increase in 2015 to 10 percent. Abe has said the economy’s growth pace will determine whether the government goes ahead with that higher levy.

Closely held Suntory Holdings Ltd. is looking overseas for growth, rather than counting on a domestic revival in demand for beer. Japan’s third-largest brewer by market share last month announced it would pay $16 billion for U.S.-based spirits maker Beam Inc.

Kirin has also expanded by buying overseas drinks makers, though it is still vulnerable to the expected slump in sales related to the tax increase because it gets about 70 percent of its revenue inside Japan.

“The sales tax increase will separate winners from losers as we will see which companies can pass through higher prices to consumers,” said Goya Nakao, a senior investment manager at Sompo Japan Nipponkoa Asset Management Co. “The distinction between those boosting earnings without the third arrow and others will be more striking next fiscal year than it was this year.”

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.