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Japan’s perfect economic wave cresting nicely

The Japanese economy is booming, wages are surging, the stockmarket is at levels not seen in three decades and the outlook is its most upbeat in years.

And, yes inflation is high – at levels that are very un-Japanese – costs are rising, not flat or falling into deflation as they have been for much of the past two decades.

Japan’s March quarter economic growth was stronger than forecast, even though its traditional strength – exports – detracted from growth in the three months.

The spring wage offensive has seen rises of between 2% and 4% in many cases with millions of workers seeing small gains in real terms for the first time in more than a decade.

The news will allow the Japanese Prime Minister, Kishida a little boasting as he hosts the Group of Seven leaders in Hiroshima this weekend.

Japan’s Nikkei share average closed above the key psychological 30,000 level for the first time since September 2021 midweek, buoyed by the weaker yen (because of the US debt ceiling talks which have triggered a move into the greenback) and momentum from a domestic earnings season that was stronger than forecast (it ended on Monday).

On top of that was the slow realisation that inflation is at last above 2% after the Bank of Japan has been trying since 2012 to achieve that result, wages have started rising strongly (by Japanese standards) and the economy is stronger than previously thought.

Friday saw the Nikkei closing in on the 31,000-point level – the highest the key index has been for three decades.

The broader Topix index is also higher and around levels not seen for 33 years.

The surge since April makes the Japanese market the best performing one globally this year.

The market, aided by inflows of foreign funds, is up more than 18% this year, double the 8.3% rise in the US market, almost double the 9.7% rise in Europe’s Stoxx 600 and six times the near 3% rise for the Australian market.

Daiwa Securities strategist Kenji Abe said the strong foreign demand for Japanese equities since April had been driven by the Tokyo Stock Exchange’s push for better corporate governance, Warren Buffett’s additional investment in Japanese trading companies, and a new Bank of Japan Governor in Kazuo Ueda who is maintaining a ‘dovish’ monetary policy stance.

On top of that is the impact of rising wages – a major policy push of the government led by prime Minister Kishida.

The contrast with Australia is startling – here economists, the Reserve Bank and silly business media jump and yell ’spiral’ when wages rise or the few remaining unions talk about making big wage claims.

In Japan, it is a cause for celebration that wages are finally rising at a pace not seen for up to 30 years, and economic growth is now positive after an unexpected technical recession in the final half of 2022.

So how does its government, business and media reaction? By pushing the stockmarket to highs not seen for 20 months in the case of the narrow Nikkei Index and 33 years in the case of the wider Topix Index.

Commentators say that for all the talk on earnings and the yen-US rate (which are important), the underlying factors are the surge in inflation and the active push by the government and many businesses to boost wages.

Wages are rising by between 2.2% for base pay and up 3.7% for headline rates.

The headline wage rises are just enough to produce real wage rises with inflation running at 3.2% annually in March (and the lowest annual pace since last September. Costs though rose 0.3% in march after a 0.6% drop in February. headline inflation reached 4% in the wake of the invasion and the surge in energy costs last winter.

Thanks to Vladimir Putin’s invasion of Ukraine and the boost to oil and gas prices especially, and other commodity costs, Japanese inflation is now well above the 2% target the Bank of Japan had in place for a decade without managing through its very easy money policy, to attain.

Average cash wages in Japan rose by 0.8% year on year in March, unchanged from February but falling short of the 3.8% consumer inflation rate used to calculate real wages.

More importantly, March was the 15th straight month of increase in nominal wages – something not seen in Japan for decades.

Annual nominal wages in Japan rose by just 4% from 1990 to 2019, compared with 145% in America, according to data from the Organisation for Economic Co-Operation and development.

Japanese unions have long emphasised job stability over wage raises; and companies have been loath to pay more because of poor productivity growth and widespread economic stagnation.

Up until the past year, Japan had been in the grip of ultra-low inflation – either disinflation (tiny price rises) or deflation (price falls).

But now wages are rising at rates not seen since the 1990’s and shares are climbing.

And it is not hurting the economy. The March quarter saw the economy expand at a faster pace than expected as a further easing of pandemic regulations boosted consumption.

Gross domestic product expanded at an annualised pace of 1.6% in the first three months of this year, exceeding analyst expectations, Government data showed on Wednesday. A revision of earlier figures also showed Japan went through a technical recession at the end of last year.

Stronger than forecast spending by consumer and businesses was the main driver behind growth in the March quarter which helped offset the negative impact from net trade which dragged on the overall figures as shipments of cars and chip-making machinery fell.

“Politically this is good timing,” said Hiroaki Muto, economist at Sumitomo Life Insurance. “It’s kind of a sweet spot. Overseas economies are still just about holding up while Japan’s economy is recovering on post-COVID revenge spending. It’s a good environment for calling an election.”

“This result is stronger than the level seen by the Bank of Japan 9the central bank) and is one step closer to a policy change,” said Atsushi Takeda, chief economist at Itochu Research Institute. “The question is whether the BOJ will revise its price outlook after confirming that the economy will continue to expand beyond April.”

At home, stronger wage growth and additional price relief measures by the government are supporting consumption. But it remains to be seen if real wage growth can keep up with the pace of inflation that is so far proving stickier than expected (like everywhere else).

Since the start of 2021, Japan’s economy has contracted five times out of nine quarters.

Inflation has remained above the BOJ’s 2% goal for a while, but Ueda expects it to fall back below the level later this fiscal year as cost-push factors in energy and commodities fade.

“Japan’s economy is finally recovering, led by domestic demand,” said Hideo Kumano, an economist at Dai-Ichi Life Research Institute. “If growth stays above 1% in the second quarter, that will mean we are heading for an environment where companies can raise wages again next year.”