Springtime for Japanese stocks

Japan may be blossoming again. Goods and wage inflation are returning, some companies are embracing real and significant corporate reforms, the equity market has surged, and foreign investors are showing sustained enthusiasm. Nonetheless, we believe investors in the Japanese market still need to be selective when searching for companies that can unlock value as not every firm is fully, or enthusiastically, warming to change.

Goods-and-wage inflation flower

The Japanese economy appears to us to be emerging from years of stagnation. We believe a rebound in inflation in both goods and wages should help the country boost economic dynamism and spark a period of hotter and more sustained growth.

Corporate Japan has shown a greater willingness and ability to raise prices and overall inflation is now approaching the Bank of Japan’s (BoJ’s) 2% target. (See Exhibit 1).

monthly japanese price index

Wage growth, which has lagged price increases, is also starting to climb as companies need to pay their employees more to afford costlier goods. The spring labor negotiations suggest a significant wage hike for Japanese workers in the coming year. Labor unions secured a 5.24% average total wage hike through three rounds of negotiations, up from an average wage increase of 3.6% in 2023, according to Rengo, the Japanese Trade Union Confederation. (See Exhibit 2).