How is the pace of economic reforms taking shape so far in Japan in 2014?

Japan began its first trading day of this week, with the Nikkei 225 stock index ending at 15,933 on January 06, 2014. At the time of this write-up, the Nikkei 225 index is currently trading at 15,927.74, off by 193.71 points, or approximately 1.20 percent lower as of 0845 hrs (Hong Kong/Singapore time), as the key resistance level of 16,000 is within sight. On a year-to-date (YTD) basis, the Nikkei 225 index is down by approximately 1.04 percent. The Nikkei 225 index has much legroom to climb further, but there could be challenges along the way that might impact some of the overall economic fundamentals in Japan, including the structural reforms which are still major challenges for Prime Minister Shinzo Abe as his team tries to steer the economy out of recession.

With the equity markets in Japan starting off at a relatively slow pace, it might be worth taking a look at some of the fiscal and monetary reform plans that have been discussed, and set in course in 2014. In a blog post published on January 07, 2014 through the website of the World Economic Forum (http://forumblog.org/2014/01/why-wages-in-japan-are-set-to-rise/), Prime Minister Shinzo Abe put his thoughts on why wages are set to rise in Japan in 2014. In his blog post, he mentioned some of the startling numbers regarding wage growth in Japan which has remained quite stagnant throughout the last few decades. He cited some statistics including Japanese wage earners have lost approximately Japanese Yen (JPY) 34.3 trillion over a the past decade and a half – an amount larger than the GDP of Denmark, Malaysia, or Singapore. On the first glance, it is quite a huge amount of money being lost, and the Prime Minister hopes to see more employers stepping up to the table to increase the wages of their workers in order to ensure a smooth implementation of the upcoming consumption tax hike from 5.0 percent to 8.0 percent in April 2014. The transition towards higher wages, and wage inflation are needed in order to ensure that household consumption levels remain stable, and Japanese wage earners are not left behind in the wake of rising prices.

In his blog post, Prime Minister has also mentioned that Corporate Japan has been poorly capitalised, and his Cabinet intends to change some of the long-held mind sets of some of the Chief Executive Officers (CEOs) that taking on more leverage is a good strategy to boost the overall valuation of these companies. Although corporate profitability for most of the Japanese corporations have been robust during 2013, thanks to ‘Abenomics’ and the weakening Japanese Yen currency, there are some corporations who are still not on par with the overall directives laid down by the Japanese Government. The Prime Minister intends to change that, and his team wants to make sure that corporate credit growth remains in check, and to avoid some of the issues faced by other nations, such as China which is currently having some difficulties in controlling the amount of financial leverage in the system.

Separately, it was reported by Bloomberg News on January 09, 2013 that the Japanese Government has plans to end some of the tax breaks on certain sectors, while keeping the other tax measures intact, and this includes the Research & Development (R&D) tax breaks being handed out to corporations which are active in the area of development technologies for the clean energy industries, bio-pharmaceutical industries, and other target sectors that could provide potentially bring about long-term economic benefits to Japan as it seeks out to compete against the global economic powerhouses such as China, and the United States.

In another Bloomberg News story on January 09, 2013, one of the members representing the private sector in Japan, Mr. Heizo Takenaka indicated that if policies are being implemented correctly, and according to the intended objectives, there is no reason why the Nikkei 225 stock index “could not easily surpass the 18,000 level in light of Japan’s economic strength”. Mr. Takenaka, who is also an active member of a government council on special economic zones, has several years of government-related working experience, including his role in spearheading Japan’s response to a banking crisis in early 2000s as an economy and fiscal policy minister during the administration headed by former Prime Minister Junichiro Koizumi.

In the Bloomberg News interview, Mr. Takenaka mentioned that Japan needs to accelerate some of the economic reforms including the relaxation of its tough immigration policies to allow foreign talent to thrive and make good contributions to spur up the Japanese economy; reductions to the corporate tax system to be included in the broader deregulation agenda for the economic zones; allowing the Bank of Japan (BOJ) to continue the pace of monetary reforms that seek to bring to an end on the deflationary conditions seen in the past, among other reforms that are growth-oriented. Mr. Takenaka sounded quite optimistic in boosting the overall economic growth, and if policies are truly being implemented correctly, there is no reason that Japan could make a comeback, but it has to be a shift in the mind sets of many Japanese people and corporations that it has to adapt to the pace of economic reforms, or risk falling behind among the rest of the global competitors.

With the various measures being outlined by the Prime Minister, and his Cabinet team, it is worth taking a step back in trying to size up some of the broader reforms that could turn out to be major economic drivers to spur Japan’s economic growth going forward. I believe that one of the immediate tasks for the Japanese government needs to deal with is the continued efforts to encourage employers to raise wages, while keeping productivity high at the same time. As the month of April 2014 inches closer when the full implementation of the consumption tax hike starts to kick in, the wage growth issue has to be at the forefront of the pace of ‘Abenomics’ reforms in 2014. The next set of reforms following that are issues pertaining to immigration reforms, corporate spending, boosting productivity through constant innovations, and moving ahead with free trade talks through the Trans Pacific Partnership (TPP) negotiations. I believe that Japan needs to reinvent itself, and not be mired in the past. There needs to be step-up efforts to boost inflation and spurring the Japanese people to join in with the government in helping to push the much needed reforms that seek to bring out the best of Japan.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

LEAVE A COMMENT