Tuesday, September 17, 2013
STOCK FOCUS: Rise In Stocks Hinges On Salaries, Profitability At SMEs
TOKYO (NQN)--The government and the business and labor communities will soon start trilateral talks on employment conditions and a salary hike, one of the government's two biggest goals in its growth strategy. If capital investment and salaries increase, sustainability of Japan's economic recovery as well as stocks will likely rise.
Despite expectations, some market players are wondering if the salary hike is possible because Prime Minister Shinzo Abe is currently facing the same problems that plagued then Prime Minister Yasuo Fukuda in March 2008.
In March 2008, prices rose in line with a surge in international commodities markets triggered by a rising demand for inflation hedging amid the U.S. Federal Reserve Board's quantitative easing. Meanwhile, incomes struggled to rise, weighing on household spending. At that time, the consumer price index rose 1.2% on the year to 101.4 (2010=100), while food prices climbed 1.6% to 98.8. Electricity fees rose 1.3% to 101.7, and gas fees saw a 4.3% growth to 98.9. Back then, the dollar was trading in the 95 yen range before appreciating to the 110 yen level in August 2008. The weaker yen further pushed up prices.
In July this year, the CPI reached 100 for the first time in 14 months. With prices steadily rising, the Japanese economy appeared to be pulling out of deflation, as envisioned by the prime minister's Abenomics policy. Looking more closely at the rise in prices, however, shows cause for concern. Electricity fees rose 10.1% to 119.2 and gas fees climbed 3.5% to 111.1, while the price of perishable food grew 2.3% to 97.1. Although the future may be looking brighter, consumer sentiment is likely somewhat grimmer than it was five and a half years ago.
Investors have now begun worrying about a "bad" rise in prices. The coefficient of correlation, which shows the link between the Nikkei Stock Average and dollar-yen rates, stood at 0.96 between the beginning of the year and May 22, when the benchmark index hit this year's highest level. During that period, it could be said that the weaker yen pushed up stock prices. However, the coefficient dropped to 0.70 from June 17 onward, during which time the yen depreciated further. With the correlation between yen rates and stock prices weakening, a rise in stocks in line with the yen's fall is becoming less likely.
Now there is a question of whether a salary hike that can absorb the price increases is possible. The return on assets (ROA) among all major companies, which exclude financial and insurance companies, for the quarter ended June rose 1.9 percentage points on the year to 5.8%. But improvement in profitability at small and midsize firms, which employ about 70% of Japan's overall workers, seems slow. The ROA among midsize firms was nearly flat, rising from 3.9% a year earlier to 4%, while among smaller business companies it dropped from 3.5% to 3%.
In addition to corporate profitability, another key to forecasting the outlook for salaries is whether there has been a change in corporate activity. The debt ratio of large companies fell from 137% seen a year earlier to 134%, while that of midsize companies slid from 190% to 167%. Among smaller businesses, it dropped from 219% to 217%.
It should be noted that even large companies whose business conditions have significantly improved have yet to review their financial strategies and move to expand their businesses aggressively.
Fukuda could not accomplish salary hike due in part to the financial crisis in the autumn of 2008. Now, it should be examined whether the benefits from Abenomics will extend from big companies to small and midsize firms and households.