James Saft, Reuters Columnist
Toyota’s sparkling earnings show how Abenomics may be good for Japanese companies now, but perhaps a bust for investing in Japan over the long term.
Toyota, the world’s biggest car maker, reported a 70% jump in profits last quarter, as it got a boost from this year’s 12% drop in the yen against the dollar.
A look under the hood, however, shows that Toyota’s gains may not translate into the sustained expansion Japan hopes Abenomics will spark. Named after Prime Minister Shinzo Abe, Abenomics is an attempt to use government spending, radical monetary policy and competitive reform to finally rescue Japan from a 20-year-plus slump.
The first step was to hammer the yen lower, making Japanese exporters more globally competitive. A weaker yen has helped Toyota, but not perhaps in the way policymakers want.
Two things have to happen for Abenomics to succeed. First, external demand prompted by a weaker yen needs to drive a self-sustaining consumer expansion. That requires wage gains.
Second, companies need to invest and expand, using a new pricing advantage from the yen to build volume, not simply to make more money on every car sold.
On the evidence thus far, neither of the two needed things is happening or is likely to happen.
Consider Toyota. While profits are up 70%, most of the focus is on increasing margins, with capital expenditure forecast to rise just 2% and research and development forecast to stay the same.
That’s hardly the massive expansion Japan needs.
And while Toyota, and others, have indicated a willingness to boost wages in the future if profits continue to roll in, thus far they’ve been far more likely to hand out bonuses rather than make permanent increases in their fixed costs.
It looks very much, in other words, as if Toyota, and likely many other companies, are happy to increase profit margins but not take on the risks of paying more and expanding rapidly. Given the history of the auto industry and Japan itself, it is hard to blame them.
Japanese workers, having lived through the past 20 years, are understandably wary about increasing spending permanently based on a one-off bonus.
And while Abe said in October that higher wages were “vital” and has used various forums to pressure companies, even corporate tax cuts haven’t had much of an effect. A recent Reuters corporate survey found that only 5% of respondents would use additional savings to raise wages.
Wages and inflation
This leaves Japanese workers in a difficult bind. Prices are rising at last, at least a bit, but wages not so much.
Core consumer prices, which include oil products but not fresh food, rose 0.7% in the year to September. Even so-called ‘core-core’ prices, which excludes both food and energy, were flat, the first time since 2008 that they have not fallen.
While that might seem like cause for rejoicing, wages have been stagnant. Salaries are in their longest slide since 2010, with regular wages excluding overtime and bonuses down 0.3% in September. Total cash earnings rose 0.1%.
Minutes of the Bank of Japan’s October meeting, recently released, showed some disquiet over the pace of wage gains, with one member noting that sustained gains might not appear before the annual wage negotiation round next April. Except then a consumption tax will increase by 3 percentage points, almost certainly more than swamping any wage increases.
The fear, of course, is that consumers won’t consume, and when next April’s consumption tax comes along, Japan will drift back into deflation and recession. And remember, Japan, as a country with very large debts and a demographic downward path, needs inflation. Only inflation, and genuine growth, will allow it to manage its debts over the longer term.
Here again we have a great example of how extraordinary monetary policy creates risks for everyone while handing out what may be short-term benefits disproportionately to the wealthy. The Nikkei 225 stock index is up by a third this year, and by 50% over the past year. Profits among exporters are, by and large, growing quite well.
Even those gains may prove to be short-lived, and taking a five-year view, investors would be wise to be very cautious about the future of Abenomics and Japanese assets.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)