With its domestic economy well positioned to decouple from the global cycle and create higher employment and purchasing power for its people, Japan is on course for a good 2019. But that outlook could materialize or be upended, depending on whether several outlier scenarios come to pass.
In a recent commentary, Jesper Koll, WisdomTree’s head of Japan, noted that the country has been through years of wage restraint as company unions chose long-term job stability over shorter-term wage increases. The labour market has become so tight that wage growth should accelerate, in Koll’s view, with the 2019 shunto wage negotiations leading to a 4% pay rise compared to the 2% delivered last year.
“Japan’s economy needs a more powerful engine to drive domestic consumer spending,” he said. “If I am right … consumption-led growth could become a reality.”
He also saw a potential turning point in Japan-China dynamics this year, particularly as Prime Minister Shinzo Abe and President Xi Jinping committed to improved bilateral relations and a more credible joint leadership role in Asia following their successful summit in October last year. Should this result in the long-shot scenario of China joining the multilateral Trans-Pacific Partnership free trade agreement, it would allay many Pacific nations’ fears of the country’s unilateral rise.
Another possible pivot point: a Japanese mega-bank acquiring a major US bank, which has been made more probable by the fall in the US stock market. “Japanese banks have been eager to expand in the US but were put off by the high prices and valuations of US banks in the past couple of years,” Koll explained. “Japanese bank CEOs may finally get their chance to act out their strong global ambitions and buy a ‘cheap’ US bank in 2019.”
Noting an upcoming rise in Japan’s consumption tax from 8% to 10% on October 1, Koll said that a commitment from Abe and the Liberal Democratic Party (LDP) to a “no more tax hikes” policy before the 2019 Upper House election would be a positive surprise. Aside from boosting the credibility of self-sustaining consumer-led growth, such a “freeze at 10%” pledge would “empower post-Abe LDP leaders to restrain runaway budget deficits by cutting expenditures and privatizing government services.”
Innovation and entrepreneurship, a critical item on everyone’s agenda, could also receive a much-needed push with backing from the country’s public and private pension funds. According to Koll, a public-private partnership incubator fund amounting to 1 trillion yen invested in domestic start-ups should help cultivate a new ecosystem.
“Ironically, the biggest obstacle here appears to be not a lack of credible start-ups and entrepreneurs but the lack of professional expertise among Japan’s pension managers and other institutional fiduciaries,” he said.
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