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Recurring pre-tax profit margin for the 2nd quarter 2013 reached a record high
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Reflationary psychology spurred 3rd quarter personal consumption levels to more than 2% year-on-year
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Wage growth is key to the success of Abenomics – expected by 2nd quarter 2014
Japanese company profits improving.
Profit margins at Japanese companies have improved dramatically and are expected to show further improvements in the coming quarters, new research from Nikko Asset Management, a related company to Tyndall Investment Management Limited (Tyndall AM), shows. Recurring pre-tax profit margins have been steadily expanding since 2003, when structural reforms first started to bear fruit in Japan’s major industries. Although the Global Financial Crisis and subsequent disasters in Japan and the wider Asia region caused profit margins at Japanese companies to falter temporarily, Nikko AM’s research shows that recurring pre-tax profit margins have structurally improved, with the four-quarter average reaching a record 4.19% for the 2nd quarter 2013 and expected to rise further in the quarters ahead.
Japan’s personal consumption figures grew slightly in the 3rd quarter 2013, leading to nearly 2% year-on-year growth, faster than the US or the Eurozone. After the VAT hike in April 2014, Nikko AM expects a major drop in consumption, but for it to bounce back firmly in the 3rd and 4th quarter 2014.
In 2014, Nikko AM will be watching the March wage negotiations in Japan very closely. With the Bank of Japan targeting a 2% inflation rate and the already announced VAT hike in April 2014, Nikko AM believes that wage growth is a key factor in the success of Abenomics policies and is confident that such will occur in early 2014. Large business groups have already signalled wage hikes and small and medium-sized enterprises will have to follow suit, to some extent. Nikko AM’s view is that the Japanese equity market will already have factored in more optimistic valuations in this regard and investors should not wait until next March to fulfil their allocations.
Nikko AM also notes that many of the deregulation or “Third Arrow” reforms are occurring internationally behind the media headlines, with significant progress especially apparent in the Trans-Pacific Partnership negotiations.
