Structural Reforms in Japan Could Support Stocks

Underpinning the above case for Japan is the country’s changing macroeconomic picture under the reform policies of Prime Minister Abe, known as Abenomics. Now into in its third full year, Abenomics consists of a three-pronged (or three-“arrowed”) approach: aggressive monetary policy to end deflation, expansionary fiscal policy to give a boost to the economy and finally, a pro-growth strategy to enhance conditions for longer-term growth and improve corporate competitiveness. Examples of this third arrow include the GPIF’s bigger allocation to equities and reforms to encourage shareholder-friendly corporate activity.

Structural Reforms in Japan Could Support Stocks

Market Realist – Structural reforms in Japan could drive economic growth and stocks.

Out of the three arrows of Abenomics, we’ve seen the first two already at work in the form of unprecedented monetary easing by the BoJ—one of the few major central banks still injecting liquidity—and a flexible fiscal policy via government spending. However, the third—structural reforms—is probably the most important one.

Corporate governance has improved with more outside directors, which could make corporate decisions more investor-friendly. Abe has also brought about changes in the labor market, and female labor force participation is now on the rise. Abe has also brought about reforms in the power and agriculture sectors.

Wage growth remains stagnant, however, as the graph above shows. Japan (EWJ) (DXJ) has seen low wages for a prolonged period now, just like the US (SPY). Wage growth directly impacts consumption as disposable income rises. Also, a rise in wages is critical in order to achieve the inflation goal of 2%. Earlier this year, Toyota (TM), Panasonic (PCRFY), Hitachi (HTHIY), and Nissan Motor (NSANY) announced the biggest increase in pay in more than a decade.

Read on to find out the Achilles heel of the Japanese economy.