Please ensure Javascript is enabled for purposes of website accessibility Japanese equities: The start of a new economic regime? - Janus Henderson Investors
For financial professionals in Luxembourg

Japanese equities: The start of a new economic regime?

Junichi Inoue, Head of Japan Equities, discusses the Bank of Japan’s long-awaited rate hike decision and its implications on the economy and stock market.

Junichi Inoue

Junichi Inoue

Head of Japanese Equities | Portfolio Manager


21 Mar 2024
3 minute read

Key takeaways:

  • Stronger wage growth was one of the main factors supporting the Bank of Japan’s recent decision to end the era of negative interest rates that aimed to support its economy.
  • Investors need to consider the impact of wage increases on personal consumption, income, inflation rates, and interest rate trends, which should lend support to the stock market.
  • Financials and domestic retail stocks could be key beneficiaries from the change in interest rate regime and stronger wage growth, respectively.

This week, the Bank of Japan decided to raise interest rates for the first time in 17 years and also announced the cessation of several quantitative easing measures. The market had been expecting the removal of negative interest rates around the spring of 2024 since the latter half of last year. However, domestic economic indicators have slowed down in recent months, and there was divided opinion on whether a decision would be made by the end of the Japanese fiscal year in March.

A need for sustainable wage growth

However, the rate of wage increases announced by companies and labour unions for the new fiscal year (April 2024- March 2025) last week significantly exceeded expected levels, which is thought to have supported the rate hike discussions at the latest Bank of Japan policy meeting. In last year’s annual spring wage negotiations, in response to inflation, there was a 3.6% wage increase on average, the highest in this century. Yet, this rate was not enough to keep up with inflation, resulting in continued negative real incomes. Because inflation alone does not determine income growth, Japan needed a trigger to enter into a new regime for sustained income growth and to continue a stable, gentle inflation trend. And that happened as a surprise.

With the new fiscal year a week or so away, major companies announced wage increases far exceeding the current inflation rate of about 2% year-on-year, including Subaru at +5.0%, beverage manufacturer Kirin at +7.5%, Hitachi at +5.5%, Insurer Dai-ichi Life at +6.0%, and Nippon Steel at +14.2%. In small and medium-sized enterprises, figures of 4-5% were also seen. From the explanations of corporate management, one can see the desire to correct the ongoing issue of low wages for employees, which has been in stark contrast to the continuous increase in salaries, dividends and executive compensation seen abroad. Despite increasing profits and improved productivity in Japanese companies, real wages for domestic workers have remained flat for over 20 years due to price stagnation. This prompted Prime Minister Fumio Kishida, in the last days of 2023, to ask Japanese firms to raise wages at a faster level than previously. The level of wage adjustment looks likely to be continued over several years. This evidences that the fruits of corporate sector reforms that began 12 years ago are finally reaching incomes.

Are market expectations for further rate rises too conservative?

If we are entering a virtuous cycle, the market’s expectation for a total of 50 basis points interest rate increases, one in the second half of 2024 and another in 2025, could be conservative. Considering the impact of wage increases on the inflation rate, two rate hikes would still maintain a significant real negative interest rate. The market needs to review future personal consumption, income, inflation rates, and interest rate trends, which could have a positive impact on the stock market.

Implications for investors

How does all of this impact our views? We continue to believe that financial stocks are well positioned to outperform as the market continues to underestimate the positive impacts from interest rate regime change. And having seen strong wage growth across a wide range of sectors, we are also increasing our confidence in the domestic retail sector, an anti-consensus view.

 

There is no guarantee that past trends will continue, or forecasts will be realised.

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.

Negative interest rates: central bank policy to encourage banks to lend out funds to counter weak economic growth. This means banks have to pay to park their excess cash at the central bank.

Quantitative easing: an unconventional monetary policy used by central banks to stimulate the economy by boosting the amount of overall money in the banking system.

Real interest rate/wages: the interest rate/wages that is received or expected to receive after allowing for inflation.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

Marketing Communication.

 

Glossary

 

 

 

Important information

Please read the following important information regarding funds related to this article.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.