Abe declares 2014 Year of Japanese “Wage Surprise”

In 2013, Japanese markets led the global markets and had their best showing since Japan’s equity bubble burst in 1990. Much of the optimism for Japan’s stock market stems from prime minister Shinzo Abe, who has embarked on what he refers to as a “three-arrow policy” to end Japan’s deflationary slump and reignite Japan’s economic vigor.

I would say the first arrow, aggressive monetary policy, has been right on the mark. The unprecedented monetary easing by the Bank of Japan—which is set to become the most aggressive central bank in the world as the Fed begins to taper its balance sheet expansion—improved sentiment in Japan, caused the yen to weaken, and bolstered the markets while stimulating inflation.

But can the positive momentum seen in equity prices in 2013 continue into 2014? There are many skeptics of the progress Abe has made on his third arrow, the “growth strategy” of structural reform to the economy.

I believe investors should take Abe’s word that he is committed to Abenomics and that important changes are in the works. Abe recently wrote an op-ed where he made some important points, and I want to bring attention to his remarks.

Abe admitted that the third arrow takes more time because, “by definition, structural reforms take more time than changes in monetary and fiscal policy do. Many will require legislation, on which my colleagues in the Diet have been spending much of their time over the last couple of months. During this process, with its seemingly endless and convoluted floor debates, observers should not lose sight of the forest for the trees.”1

Abe’s Forest: A Wage Surprise in 2014

A key to navigating Abe’s forest in 2014: a coming “wage surprise.” I believe Abe is trying his best to make sure investors are not surprised when the wage “surprise” occurs.

It all started with a positive shift in confidence, for individual Japanese consumers as well as businesses. Abe declared, “Abenomics, I am proud to say, has been successful in a more fundamental sense: we have rebooted Japan’s collective psyche.”