While much of the world is grappling with growing levels of inflation, it has not been a problem in Japan.
What are the reasons for this, and where do the opportunities lie? And is now a good time for UK investors to consider Japan?
There are fundamental differences in Japan’s economy to explain why inflation is not the problem in Japan as it is in many other parts of the world.
Firstly, underlying consumption has stood still in the past decade or so.
Secondly, there has been virtually no wage growth in Japan.
Over the past 30 years, wages grew by just 3 per cent – much lower than the OECD average – while the latest data shows that Japan’s base wage grew by less than 1 per cent.
Generally speaking, without rising household income, you cannot expect inflation to accelerate.
Although Japan’s CPI has picked up recently, this is mainly due to the reopening of the economy after the state of emergency earlier this year. This pick-up is being driven by cost-push effects, rather than increased demand.
Another key difference in Japan is the extremely conservative attitude of householders.
More than half of Japan’s household assets are held in bank deposits, with only small amounts in the stock market.
As a result, the 'wealth effect' in Japan has been subdued – the majority of Japanese people have not benefited from the surging stock market post-Covid, another reason inflation has been quite mild.
On the bright side, this conservative mindset means Japanese companies have large cash reserves on their balance sheet.
Their attitude towards shareholder returns has improved significantly in the past decade, as share buybacks hit a record high level in 2021 and we expect more to come.
Notably over the past few months, a number of companies announced increased dividend payout ratios as well as share buybacks, with the intention of protecting shareholder returns in this volatile market.
We believe that inflation will stay relatively mild in Japan and interest rates should remain low.
We expect both monetary and fiscal policies to continue to be supportive in the foreseeable future.
The effect of a weaker yen on Japan's inflation
Energy CPI in Japan has risen by just 45 per cent since the beginning of 1996, whereas in the US and Europe it is up by more than 150 per cent.
The price of crude oil has risen by more than 1,000 per cent from trough to peak while energy prices in Japan have risen by just 30 per cent.
Since energy is only 7 per cent of Japan’s overall CPI budget, even if the crude oil price doubles in yen terms, the impact on CPI is a negligible 0.4 per cent.
Similarly, if we compare Japan’s food CPI with global food prices, there is absolutely no correlation. The impact from a weaker yen on inflation in Japan is very, very limited.
