Last updated: 17:33 / Thursday, 13 February 2014
Column by Matthews Asia

Two Questions for Japan Inc.

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Two Questions for Japan Inc.

During my last research trip in November, we visited mostly consumer-facing companies in Japan where we took the opportunity to pose two key questions to the management teams we met. The first was—“Are you planning to increase prices for products or services after Japan’s consumption tax hike (scheduled for April)?” And secondly: “Will you raise employee wages?”

To our surprise, many of the firms we met with said it would be difficult to increase prices for their products or services. While they seemed concerned about the rising costs of imports due to the weakening yen, they were also wary of meeting resistance from their customers, or possibly losing customers to competitors who may keep prices more stable. They also said they were quite reluctant to increase base salaries for their employees, noting that they would first need greater confidence that a more permanent, fundamental turnaround was occurring in Japan's economy.

Opinion writer and Waseda University Professor Norihiro Kato has argued that Japan’s younger generations, those who came of age after the bursting of the country’s economic bubble, have never known what a booming economy feels like. They have not experienced inflation or rising wages. “They are accustomed to being frugal,” he wrote in The New York Times. “Today’s youths, living in a society older than any in the world, are the first since the late 19th century to feel so uneasy about the future.”

I suspect a similar trait has been embedded somewhat into parts of corporate Japan, especially in consumer-facing companies. Like Japan’s younger generations, many Japanese companies also have not experienced rising prices, regular wage increases and investments rather than savings over the last two decades; some firms may have experienced only the same sense of frugality and caution as the youth in its society.

Shaking this mentality of a deflationary environment may be key to what some parts of Japan Inc. need to help boost its economy. The central bank can overcome this obstacle by sticking to its guns on its monetary policy, creating expectations of higher nominal GDP. Fortunately, since the beginning of this year some larger Japanese companies have already announced wage or price increases. Also, some recent statistics in Japan, such as an increase in the consumer price index and the availability of jobs (measured as the ratio of job offers per job seeker), may pressure companies to raise wages. We hope to see more signs that Japan appears to be finding a virtuous cycle of economic recovery and growth.

Kara Yoon, Research Analyst at Matthews Asia

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change.  It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquid­ity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.


 

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