WisdomTree has compiled a Japan Strategist roundtable—a compilation of views from three of the most widely followed Japan investment strategists. In separate one-on-one interviews, we asked these strategists to share their views on Japan’s equity markets, the economy, government initiatives and the currency.
Below is part of our discussion with Jesper Koll of J.P. Morgan Japan and his take on the economy, labor market issues, Bank of Japan policies and factors impacting the yen.
Jesper Koll believes resource constraints are spurring wage growth and that this is central to his focus on a theme of “domestic demand.” Jesper, please talk about this.
Jesper Koll: Let me give you a thesis for Japan: I think Japan is going to be the one society where a new middle class is emerging, because you’ll find that the domestic service sectors, which is predominantly merchandising and individual services, over the last 20 years have seen wages decline by an average 1.5%. That, because of the greater shortage of workers, is now going to inflect up. The low-end employees at smaller companies, the mom and pop shops, as well as employees in the merchandising and domestic service sectors, wages are actually going up.
This is why you think the consumption tax in April is really a non-event?
Jesper Koll: Yes, absolutely. People look at wage growth, and they focus on the base pay negotiation. Well, I’m terribly sorry. The base pay negotiation applies to companies that are in the manufacturing sector and only employ 17% of the people. In the national income statistics and the gross domestic product (GDP) statistics, workers’ compensation currently is rising already at a rate of about 2.5%.
Moreover, on demographics, Jesper thinks there are important changes in the works.
Jesper Koll: The baby boom drag—the baby boomers moving to retirement—is over, and the children of the baby boomers for the first time in their employed lives are actually seeing greater stability of jobs. More people are going to be hired on a full-time basis. Once that happens, you start to have a family. As the certainty of lifetime income improves, you get greater household formation, marriage rates go up, and then before long, you’re going to have another baby boom.
Jesper, you’ve said the Bank of Japan (BOJ) is not “pushing on a string” and that a surprise for 2014 will be that inflation exceeds 2% by mid-year, keeps on rising, and by end-2014, the BOJ policy board forecasts 3.1% inflation for 2015. What drives this?
Jesper Koll: Yes. I think the most important thing in Japan is that you are hitting resource constraints. The labor market is shrinking. Every year, there are about 750,000 people leaving the Japanese workforce. Before long, a labor shortage puts real upward pressure on wages and puts pressure on inflation. Japan for 2013 and 2014 is in a sweet spot where productivity is rising faster than wage growth. But, eventually you’re going to have unit labor costs actually beginning to increase.
Labor market reform is a big topic, given the declining labor force. What do you think Abe should be doing?
Jesper Koll: The one reform that needs to happen: a more open immigration policy. Let me be very clear. That’s not Mr. Abe’s fault. That is not the fault of the visa rules and regulations—it’s a function of corporate governance really being very closed to outsiders and whether these outsiders are non-Japanese or whether they are females. You can’t change this management style legislatively; corporations have to change. There are some examples of this occurring. Lawson, the second-largest convenience store operator in Japan, three years ago started a policy: Every third person they hired here in Japan is a non-Japanese. The CEO is globally educated, and the moment he became the CEO, he forced the HR department to open the doors to employ non-Japanese.