What will drive this change going forward?
Jesper Koll: The scarcity of labor is becoming acute, and it will be a necessity. When you look at the logistics business, shipping parcels, base pay is rising at a rate of 9% compared to a year ago. In the construction industry, base pay is increasing at a rate of between 12% and 15%. Literally, a lot more money right now cannot buy you an additional construction worker. At the top end of the economy there’s still excess. There’s still an excess of utility workers, government bureaucrats and public sector employees. To some extent, there’s an excess of employment in manufacturing, where more robots are being used. But at the lower end there is a shortage, and this is putting wage pressures and could cause Japan’s companies to open up.
Another important factor for Japan is the current account situation. Please discuss this.
Jesper Koll: Japan is no longer a creditor country, it’s a debtor country. You’ve seen the current account data now showing a structural current account deficit. This has very, very big implications for the macro of the country. It makes it likely that the yen is going to be a weak rather than a strong currency.
How much of this is the oil imports, and how much is buying ahead of the consumption tax?
Jesper Koll: One-third of the deterioration of current account is due to the terms of trade and the higher fossil fuel imports that Japan is doing because it’s gone ex-nuke. But exports are not picking up, because more than two-thirds of production has shifted overseas. Five years ago, it was only 45%. No matter how weak the yen, Japan’s official exports are unlikely to be accelerating from here. But importantly, you and I as investors don’t really care. In fact, every time a Japanese company announced that they are buying another global company or that they’re building another offshore factory, I hop up and down in joy because profit margins on offshore factories are typically two-and-a-half to three times higher than they are on Japanese factories. This is good for profits.
When you look at the yen’s impact on the big exporters, given this offshoring phenomenon, how does a weak yen increase profits like it has for big companies like Toyota1?
Jesper Koll: The year-on-year increase in dollar earnings translates into higher yen revenue (with the yen weakening). You’re increasing your dollar costs as well. It’s obviously not a one-for-one relationship. Given the fact that the profit margins are in Toyota’s case about 3.5 times higher for the American operations, the impact is a significant positive. In general terms, for the listed company, a 10% depreciation of the yen against the dollar basically adds back about 10% to corporate earnings from current levels.
We very much thank Jesper Koll for his participation in our roundtable. You can read the full commentary with more comments from Jesper Koll and other Japan strategists here.
1As of 12/31/2013, the WisdomTree Japan Hedged Equity Fund (DXJ) held 4.78% in Toyota, the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) held 0.00% in Toyota, and the WisdomTree Japan SmallCap Dividend Fund (DFJ) held 0.00% in Toyota. For a full list of current holdings of the WisdomTree ETFs, please visit wisdomtree.com.
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