In a remarkable turn of events, the Nikkei Index shattered previous records, consistently surpassing the 39,000-point mark last week and inching past the historical 40,000-point threshold. This surge follows the announcement of unprecedented net profits by listed companies for the fiscal year 2023, which are projected to surpass ¥47 trillion (about $313.2 billion).
Underpinning a Strong Real Economy, Corporate Profits Reach New Heights
According to forecasts compiled by SMBC Nikko Securities, the net profits of 1,430 companies listed on the Tokyo Stock Exchange’s Prime Market for the fiscal year ended March 2024 are expected to increase by 12.9 percent, to more than ¥47 trillion, marking a historical peak.Notably, the manufacturing sector’s total net profit is predicted to rise by 15.7 percent from the previous year, signaling a departure from the bubble era’s reliance on real estate and indicating a robust real economy fueling growth.
This economic landscape challenges the notion that Japan’s stock market resurgence is a replay of past errors. Mitsumaru Kumagai, senior economist and a managing director at the Daiwa Institute of Research, for example, points out that despite the Nikkei Index reaching levels reminiscent of the bubble era, the fundamentals now are starkly different. With a current price-to-earnings (P/E) ratio of about 16, compared to the bubble period’s of 70, the market valuation is deemed solid and not overpriced.
The P/E ratio is a metric used to assess whether stock prices are high or low, and signifies that the current stock price is 16 times the net profit per share, highlighting the market’s grounded valuation.
Market analysts are increasingly recognizing a distinct shift from Japan’s speculative bubble era, highlighting that the current rise in stock prices is underpinned by genuine corporate profit growth and solid performance. This marks a notable alignment between the stock market valuations and the actual capabilities of Japanese companies, signifying a mature and more sustainable phase of economic development.
During an interview with The Epoch Times, North American investment adviser Mike Sun reflected on Japan’s economic journey post-bubble era, famously known as the “lost decades.” He observed that Japan has undergone significant structural adjustments during this time, moving away from its previous economic stagnation. The resurgence to peak stock market values is not merely a numerical milestone but a testament to the strength and transformation of Japanese corporations.
Mr. Sun elaborated on the strategies that have been pivotal for Japan’s economic turnaround. “After the bubble burst, the Japanese economy remained sluggish for over 30 years, but during this process, Japanese companies adjusted their economic structure while eliminating excess capacity. Relying on high technology domestically and adjusting the economy through manufacturing; expanding investment abroad and promoting trade development have played a decisive role in economic recovery,” he explained.
A Land Where Inflation Is Good News
Unlike Western nations, inflation is often viewed as good news for Japan, primarily because it marks a shift away from the country’s long-standing battle with deflation, a condition characterized by persistent falling prices and economic stagnation.While falling prices might appear advantageous to Western consumers grappling with inflation, policymakers globally have harbored deep-seated fears of their economies succumbing to the same predicament that ensnared Japan in the late 1990s.
Deflation can have a detrimental impact on the economy by encouraging consumers to postpone purchases in anticipation of lower prices, leading to reduced consumer spending, diminished business revenues, and overall economic slowdown. Therefore, the emergence of inflation signifies a reversal of this trend, potentially signaling economic growth through increased consumer spending and investment.
Moreover, inflation can aid Japan in managing its substantial public debt, which is among the highest in the world. By diminishing the real value of debt, inflation makes it easier for the government to handle its financial obligations. In addition, inflation can bolster Japan’s exports by potentially depreciating the yen, making Japanese goods more competitive on the global market. This can stimulate production, create jobs, and foster economic expansion.
Escaping Deflation: Potential for Substantial Wage Growth
As Japan’s economic landscape exhibits signs of entering a new growth phase, with the Nikkei Index surpassing historical highs and corporate earnings on the rise, the focus shifts to whether the nation can successfully transition from a deflationary environment to one of inflation.A critical measure of this success lies in the outcome of the annual spring wage negotiations, known as “Shunto,” where companies and labor unions come together to discuss wage increases. These negotiations are pivotal for stimulating domestic demand and securing an escape from the long-held grip of deflation.
Since 1955, the Shunto has played a significant role in determining the fiscal year’s wage and benefit standards, traditionally occurring between February and March. This year, Prime Minister Fumio Kishida made a notable intervention ahead of the negotiations, urging for wage increases to surpass those of the previous year during a meeting on Jan. 22 with stakeholders from government, labor, and business sectors.
Amid signs of economic recovery in Japan, a tightening labor market presents both challenges and opportunities. The Ministry of Internal Affairs and Communications reported a drop in the unemployment rate, to 2.4 percent, in January, marking the first improvement in three months. Concurrently, the job-to-applicant ratio remained stable at 1.27, indicating a healthier employment landscape where job vacancies outnumber job seekers.
However, the recovery’s benefits have not been uniformly felt across sectors. While health care and welfare face persistent personnel shortages, industries like construction and manufacturing struggle to attract workers due to squeezed profits from rising costs.
The financial performance of Japanese companies offers a stark contrast to the wage growth experienced by workers. In fiscal year 2023, net profits for listed companies soared to ¥74 trillion, approximately four times the peak of ¥18 trillion seen during the bubble economy of 1989.
Yet, when comparing worker wages over the same period, the increase is modest. From an average wage of ¥4.02 million in 1989 to ¥4.57 million in the fiscal year 2023, wages have only risen by approximately 1.1 times, highlighting a disparity between corporate profitability and wage growth.
This gap underscores the importance of the upcoming Shunto negotiations as a potential turning point for the Japanese economy. Significant wage increases could serve as a key indicator of Japan’s ability to foster a robust domestic demand, essential for a sustainable transition from deflation to inflation.
The recent economic upswing and labor shortages in Japan are catalyzing a trend toward higher wages, with a significant percentage of employers indicating plans to increase salaries for fiscal year 2024.
A survey conducted by Tokyo Shoko Research, published on Feb. 21, revealed that 59.7 percent of companies intend to raise wages, with the average wage increase rate soaring to 4.16 percent from the previous year’s 2.10 percent. This marks the most substantial hike since the survey’s inception in 2006, signaling a shift in the economic climate that could influence the broader deflationary cycle.
The survey highlights a cross-sectional willingness among various sized enterprises to adjust wages upwards, with medium-sized businesses hitting a 60 percent inclination towards wage increases and small enterprises surpassing the halfway mark.
Notably, large corporations are leading the charge in this new wage trend. Honda Motor, for instance, has set a precedent by agreeing to the union’s demands for a significant pay raise during the 2024 spring labor negotiations, marking its most considerable wage increase since 1989.
The agreement includes a monthly salary boost of ¥21,500 (about $143) when accounting for additional increments from previous training expense negotiations. Similarly, Mazda Motor has committed to substantial wage increases, endorsing the union’s request for a monthly pay raise of ¥16,000 (about $106) and a 5.6-months bonus, the highest since 2003.
These developments come at a time when the sustainability of Japan’s deflation exit strategy, primarily reliant on monetary easing policies, is under scrutiny. Kazuo Ueda, the governor of the Bank of Japan, expressed a cautious stance on adjusting the extensive quantitative easing policy, emphasizing the importance of observing wage increase trends before making any policy shifts.
While speaking after the meeting of G20 finance ministers and central bank governors, Mr. Ueda highlighted that while the demands from labor unions surpass last year’s, and large companies exhibit a positive stance towards wage increases, it is premature to confirm the sustainability of the price target achievement.
Mr. Ueda’s comments reflect a broader anticipation of the spring labor negotiations’ outcomes as a crucial indicator of Japan’s economic direction. The positive attitude of large companies towards wage increases, coupled with the optimistic wage negotiation trends, could play a pivotal role in steering Japan away from the deflation that has plagued the economy for over three decades, marking a significant moment in Japan’s economic policy and labor relations history.
Unstable Factors in the Japanese Economy
The economic landscape in Japan, while showing signs of robust corporate profitability and labor-market tightening, is juxtaposed against a backdrop of potential economic challenges and policy adjustments. Despite the Bank of Japan’s considerations for tweaking its expansive quantitative-easing measures and possibly reversing the negative interest rate policy, the nation faces several uncertainties that could impact its economic trajectory.Private research institutions have raised concerns over the potential for negative growth in the real GDP for the first quarter of 2024. Should this prediction hold true, it would mark the third consecutive quarter of negative growth for the Japanese economy, signaling a worrying trend of contraction. Furthermore, the issue of wage growth not keeping pace with inflation adds another layer of complexity. With real wages declining for 21 consecutive months, the disparity between nominal wage increases and the rising cost of living underscores a critical challenge facing the Japanese workforce.
The upcoming monetary policy meeting by the Bank of Japan on March 18–19 is poised to be a pivotal moment for the nation’s economic policy direction. Stakeholders are keenly awaiting the central bank’s assessment of wage increase trends and its capability to sustainably achieve a 2 percent inflation target. This meeting could signal significant shifts in Japan’s monetary policy, with potential implications for both domestic and international economic dynamics.
Given these factors, the question of whether Japan can secure significant wage increases becomes not just a matter of domestic economic policy but also a bellwether for the country’s ability to navigate through its current economic uncertainties. The outcome of these discussions and policy decisions will likely have far-reaching effects, influencing Japan’s prospects for escaping its prolonged deflationary period and setting a course for sustainable growth.
