Seeds of Discontent Being Sown in Abe’s Own LDP

According to a recent issue of Sentaku, a Japanese language magazine providing analysis of Japan’s politics and senior management,

Powerful politicians within Abe’s own LDP party have had enough and are pushing back at what they see as an “arrogant and self-centered” attitude of Abe’s inner circle, in addition to being increasingly uncomfortable with the “total collapse” of Abe’s diplomatcy, particularly vis-à-vis China and South Korea, and of his attitude toward changing Article 9 of Japan’s pacifist constitution, i.e., in indicating that it is his ultimate responsibility, as opposed to the historical evolution of Japan’s current stance toward Article 9.

(1)   Yasuo Fukuda is an elder statesman who stepped down as prime minister in 2008 and was chief cabinet secretary under the Junichiro Koizumi cabinet between 2001 and 2004. In March of this year, a leading figure in the LDP reportedly asked Fukuda to join the sub-group forming to improve relations with China and South Korea, which have noticeably soured over the past few years. Fukuda is now the facilitator for an anti-Abe LDP group that includes, (1) Lower House Budget Committee chairman Toshihiro Nikai, (2) former PM Yoshiro Mori, (3) former LDP secretary general Mikio Aoki, (4) former LDP secretary general Makoto Koga, (5) LDP General Council chairwoman Seiko Noda, (6) head of a special intra-party panel reviewing national security-related legal matters Shigeru Ishiba, (7) chairwoman of the party’s Policy Affairs Ressearch Council Sanae Takaichi,(8) secretary general of the LDP Upper House caucus Masashi Waki,

In Fukuda’s view, a) visits by a PM to Yasukuni Shring are a serious impediment to relations with neighboring countries in Asia, and he went so far as to write a report urging construction of a national, non-religious facility where Japan could honor its war dead without also honoring so-called Class A war criminals and antagonizing victims and adversaries of Japan during its wars, b) Japan’s diplomacy toward North Korea’s past abductions of Japanese citizens, which was a major reason for his resignation from his cabinet post in May 2004, c) urges much more tact regarding the Comfort Women issue, and c) is against Abe’s stance on collective self-defense and his having the “ultimate responsibility” over what are constitutional matters (i.e., changing Article 9 of Japan’s pacifist constitution).  Further, “careless” comments from the Abe Administration about these issues have infuriated some in this group.

Also checking Abe’s agenda on several fronts is junior LDP coalition partner, New Komeito. Yoshio Urushibara, chairman of New Komeito’s Diet Policy Committee, sees Abe’s attitude as turning a deaf ear to ordinary citizens’ voices.

This “anti-Abe” group ironically was instrumental in clearing the way for the first meeting between Abe and i South Korean president Park Geun-bye, under the strong urging of US president Barak Obama. But whatever hope there was for progress in this meeting was undermined by special advisor and close associate Koichi Haguida’s controversial remarks on the comfort women issue, which of course is a hot button item between Japan and South Korea. Haguida had also scolded the US for expressing “disappointment” over Abe’s visit to Yasukuni.

Further, the lack of coordination among Abe’s inner circle is also dragging Abe down.Those in the LDP are now more organized, active and critical of Abe than those in the Cabinet and the Prime Minister’s Office. Thus domestically at least, the growing view is that Abe is up against the wall regarding his stance on diplomacy and security, two areas where Mr. Abe likes to think he excels.

Japan’s Growing Labor Shortage; First Jobs, Then Wages?

Growing wages is seen as a key to a sustainable recovery in Japan, and the growing shortage of labor in many industries could well be a preamble to a general trend toward higher wages, even without a further jawboning by the Administration for companies to increase wages.

A growing range of industries, from construction, manufacturing, restaurants and distribution, are seeing a growing labor shortage, after slashing contract worker rolls during the 2008 financial crisis and ensuing deep recession. To retain/attract workers, So far, most of the demand has been for contract workers who don’t enjoy most of the benefits offered full-time employees. Japanese companies are trying various initiatives, including pay hikes. . Japan’s labor market has actually been tightening since July 2011. This is already leading to wage increases for contract workers in, for example, the restaurant sector, where wages in large cities have risen YoY for the past 28 months to an average of around JPY924/hour.

“The low birthrate and aging society have dried up the human resource pool,” Tadashi Yanai, president and chairman of Fast Retailing Co., which operates the Uniqlo fashion chain. “The time when you could get people by offering ¥1,000 per hour is over.” One government countermeasure is to ease restrictions on foreign worker terms in Japan.

In the healthcare/nursing care sector that has seen well over 2 million jobs created after 2005, the government sees increasing foreign worker participation as essential to addressing the low birthrate and aging population.

What the Japan Life Insurers Association Wants to See from Japanese Management

The Japan Life Insurers Association (JLIA) has released their latest survey of listed Japanese company efforts to improve shareholder value. The annual survey for FY2013 surveyed 1,129 companies (with some 575 companies responding) and 158 Japanese institutional investors. In short, the biggest beefs the JLIA has with their investee companies are,

1) Establishment and Disclosure of Mid-Term Management Targets

a) Better disclosure and explanation of established mid-term management plans.

b) Specific ROE target levels and plans to improve this over time.

c) Better explanations for the appropriateness of the company’s capital plans and use of cash on hand.

2) Better Shareholder Returns

a) Better explanations, establishment and disclosure of policies for improving shareholder returns.

b) The adoption of a 30% dividend payout policy as a standard, medium-term payout.

c) More active shareholder buyback programs.

3) Better Corporate Governance

a) Better engagement with shareholders/investors and regular auditing/review of legal compliance.

b) Better explanation of management proposals to shareholders and making proxy voting easier.

 

While the Association does see continued interest in engagement on both the part of institutional investors and corporates, they do see significant perception gaps between the two parties regarding the above issues.

 

 

Japan’s Giant GPIF Pension Fund Shifts to Equities and Foreign Assets

Japan’s JPY124 trillion public pension fund, the largest in the world, is shifting assets to equities and foreign bonds, away from domestic government bonds (JGBs). At the end of its FY2013 (to March 2014), the pension fund shifted its target allocations as follows;

Domestic bonds to 60% (from 67%), Domestic stocks 12% (11%), International bonds 11% (8%) and International stocks 12% (9%). It is also increasing its mandates to foreign asset management firms, away from traditional domestic pension fund managers such as the life insurance companies.

It is currently seeking foreign managers for its foreign bond portfolio, and has recently added 10 new (mainly foreign asset manager) mandates while cancelling 8. New foreign manager mandates (which average about $3.0 billion per mandate) include,

-Capital International Inc.
-Goldman Sachs Asset Management
-Dimensional Fund Advisors
-Russell Implementation Serivces
-Harris Associates
-Taiyo Pacific Partners
-FIL Investments (Japan)
-J.P. Morgan Asset Management　（Japan）
-Invesco Asset Management (Japan)

One feature of the new domestic stock active management mandates is that it includes “activist” asset managers that in the past have engaged with Japanese corporate management, such as Harris Associates and Taiyo Pacific Partners.

At the same time the GPIF has diversified its passive management investment benchmarks from Topix-only, to the new JPX-Nikkei 400, MSIC Japan and the Russell Nomura Prime indices, and is partnering with the Development Bank of Japan and the Ontario Municipal Employee’s System to expand its infrastructure investment portfolio to some 0.2% of total assets, and is looking at expending its alternative investments, i.e., real estate, private equity and hedge funds in a bid to improve failing investment returns.

 

Time for Another Shot at the “Widow Maker” Short JGBs Trade?

Recent research by Barclays (and highlighted on the Zero Hedge site) points out the discrepancy between the JGB (Japan 10-year government bond) yield curve and economic recovery/inflation expectations. Forward JGB rates began to fall off at the end of 2010, or two years before Abenomics and the BoJ’s “shock and awe” QE bond purchases–suggesting the deflation in bond yields is not simply due to BoJ pressure on bond yields from JPY70 trillion/year purchases of JGBs. It is also not in sync with the conjecture that Japan’s economy has entered sustainable recovery and inflation to the 2% level has returned.

Indeed, JGB yields were some 100bps higher during the middle of the deflationary period between early-mid 2000s and during the deep recession/renewed deflation during the global economic downdraft of 2008-2009. The decline in JGB yields has continued through a global bond market correction in 2013 as expectations rose for better US economic growth, and the significantly weaker JPY.

The Barclays research sees a high probability of a full cyclical recovery and normalization of inflation to the 2% range, and stock prices have already discounted at least a part of this scenario, while nothing like this is pried into the JGB curve, which is failing to price in even a partial eventual success to the Abenomics reflation agenda. This suggests bond market expectations are strong for further BoJ easing, that is ostensibly predicated on BoJ concern that their 2% inflation target is not taking hold, and/or their sanguine economic outlook is in doubt.

But JGB yields have never (at least over the past few decades) moved according to the dictates of foreign investor expectations. And unless there is clear evidence (undeniable to even skeptical domestic investors) that Japan’s economy has entered a sustainable recovery and that this recovery is pulling up prices, we suspect the next attempt to short JGBs will only add to the “Widow Maker” legend.

 

Hollowing-Out, Not Nuclear Power Stoppage, Is Main Reason for Japan’s Trade Deficit

A Daiwa Institute of Research (DIR) paper shows that the main reason for Japan’s now-structural balance of trade deficit is not mainly due to increased fossil fuel imports with the closure of some 54 nuclear power plants after the March 2011 Tohoku earthquake and nuclear power plant disaster. Rather, the main reason for the structural trade deficit is the accelerated hollowing-out of Japan’s manufacturing/export sector after the global financial crisis (Lehman “shock”) which erupted in September 2008.

Japan recorded a trade deficit of JPY11.5 trillion in 2013, some JPY7 trillion of which was caused by accelerated export sector hollowing-out due to a surge in JPY versus USD from JPY124/USD in 2007 to a new historical high around JPY76/USD in 2011. DIR estimates JPY7 trillion of red ink came from the hollowing-out; JPY5 trillion from a replacement of exports with overseas supply, and JPY2 trillion from import replacement.

If the BoJ’s extraordinary QE (quantitative easing) results in further (secular) yen weakness and the shift to overseas production stops, hollowing-out could still contribute some JPY2.5 trillion/year to Japan’s balance of trade deficit. If JPY remains around JPY100/USD (i.e., strong), further hollowing-out could add JPY7 trillion to Japan’s trade deficit over the next 5 years.

This suggests a) that Japan’s balance of trade deficit will not improve noticeably even if Japan were to restart several nuclear electric power plants now sitting idle, and b) further JPY weakness will first exacerbate the BoT deficit as long as Japanese companies prefer to expand overseas production capacity at the expense of domestic production capacity.

Hangover from Front-Loaded Consumption Ahead of Japan’s April VAT Hike Not as Bad as Feared

In 1997, Japan’s first introduction of a value-added tax (VAT) produced heavy front-loaded expenditures ahead of the tax, and a heavy hangover in the aftermath, with the fall-off in consumption being the introduction to a renewed recession.

This time, businesses and economists were also fearful of a drop-off in consumption after the new VAT (5% to 8%) kicked in in April, but it anecdotal evidence shows the drop-off won’t be as bad this time, because the lack of a big bubble of expenditures before the hike. Thus Bloomberg and other surveys of as much as a 4% drop-off in Japan’s GDP in Q2 calendar 2014 are probably too bearish.

Department stores have experienced a tumble in mainly big ticket items, sales,  by 10 to 20 percent YOY in the first six days since the tax increase. However, some food item sales have been growing,  particularly those difficult to stockpile, showing daily consumption remains solid despite the tax increase. Many of the companies are saying the slump was in line with expectations. Family restaurants such as Royal Host Co.,reported sales growth of about 8 percent so far in April.Gyudon beef-on-rice restaurants like Zensho Holdings and Matsuya Foods Co. are also reporting year-on-year sales growth. Consumer electronic retailer Bic Camera Inc. sasays its sales tumbled by about 40 percent in 1997, but the sales drop has fallen short of fears this time. have remained at almost the same level as the previous month.

Japan’s Mammoth GPIF Pension Funds Shifts to Equities and the new JPX Nikkei 400 Index as its Benchmark

Japan’s, and one of the world’s largest, public pension funds, the Government Pension Investment Fund (GPIF) is set to revamp its conservative asset allocations away from bonds and fixed income into equities and alternatives like REITs (J-REITs in Japan). Some are calling this the biggest change in the history of the fund, which manages nearly ¥130 trillion ($1.26 trillion), while cynics dismiss the move as largely a symbolic step toward the more significant step of increasing the fund’s stock allocation.

The GPIF has also adopted new investment benchmarks, including the MSCI Japan, Russell Nomura Prime, and the Tokyo Stock Exchange’s new JPX-Nikkei 400, while dropping the all market, market cap-weighted Topix index of 1,700 listed shares. The JPX-Nikkei 400 universe is selected from the TSE 1, TSE 2, Mothers and JASDAQ exchanges, not just larger TSE 1-listed companies. The index also uses Return on Equity (ROE), market capitalization and a qualitative governance and disclosure ranking to select shares included (deleted) from the index. The GPIF’s selection of the index as a benchmark makes the JPX-Nikkei 400 the de facto benchmark, at least for domestic pension fund managers.

Japan’s LDP Approves a Draft New Basic Energy Plan

On April 4, Japan’s ruling coalition led by the Liberal Democratic Party and New Komeito approved a government-drafted basic energy plan for the nation that calls for accelerating efforts to promote renewable energy. The ruling parties also agreed to set up a ministerial panel to lead renewable energy promotion.

Nuclear power used to be the workhorse of Japan’s energy supply infrastructure, but since the Tohoku disaster, nuclear power has plunged from some 30% of total energy supply to effectively zero to 6%. In turn, dependence on fossil fuel electricity surged to 90%, tipping Japan’s balance of trade into structural deficit.

According to the draft plan, a) renewable energy goals will be expanded, but b) some nuclear power plants will be restarted once “their safety” is confirmed, in order to ensure a “multifaceted, diversified and flexible energy supply infrastructure. Japan will continue to pursue alternative energy supply sources such as solar, wind, geothermal, hydroelectric and biomass power generation, but will remain heavily dependent on imported LNG (natural gas) and other fossil fuels for the foreseeable future.

 

 

Compared to US and Many European Job Markets, Japan is Looking Pretty Good

Top-down, Japan’s job market was firming and recovering even before Abenomics. Despite the sad stories about the “lost generation” of younger workers and structural unemployment on TV and in the media, Japan’s labor market in terms of unemployment, at least from the data compiled by the Ministry of Internal Affairs and Communications’ Bureau of Statistics, shows an already firming and recovering labor market.

According to this data, the ratio of completely unemployed persons in Japan has fallen to 3.6% from an average 4.6% in 2011 and a peak 5.6% in July 2009. By major segment, the most jobs lost between Jan.2005 and Feb. 2014 were in the construction and manufacturing sectors (-1.8 million), but significant gains in employment were seen in the healthcare/welfare (+2.2 million), IT (+330,000),education (+310,000) and scientific research (+250,000) sectors, indicating the increase in jobs was not merely low-paying service jobs, as new healthcare/welfare jobs alone easily exceeded the decline in construction and manufacturing jobs.

Cash employment earnings have not fared as well. Cash earnings as a whole have declined over 8% since 2005, with particularly large declines seen in heretofore high-paying finance jobs (-12%), but cash earnings have risen in the IT, and personal/amusement services and even the mining and construction sectors. It has been a double whammy in manufacturing, as employment and wages have both declined. On the other hand, the surge in healthcare/welfare jobs has pushed down average cash wages. In other words, most people still in the labor force have or could get jobs, albeit at declining wage levels.

The male/female inequality gap is most glaring when it comes to “regular employees with benefits” jobs versus contract or part-time employee jobs. There are some 22.4+ million males in regular employee jobs, but only 9.7+ million females, while there are only 6.4 million males in contract, part-time jobs versus 13.5 million females. The biggest employers for males are in the manufacturing, retail/wholesale and construction sectors, whereas the most jobs for females are in the healthcare/welfare, retail and hospitality sectors, although manufacturing still employees slightly more females than the hospitality sector does.