A Deeper Look at Japan's Economy and Market

Hennessy Japan Fund Portfolio Manager Masa Takeda provides an update on significant events in Japan from 2022 and gives his outlook on what 2023 might bring.

January 2023
  • Masakazu Takeda
    Masakazu Takeda, CFA, CMA
    Portfolio Manager


Beau Barnett

Hi, everyone. My name is Beau Barnett, and I'm the Sales Director for Hennessy Funds. We appreciate you taking the time out of your busy schedules today to view a brief, but informative update from Masa Takeda, the lead Portfolio Manager of the Hennessy Japan Fund.

If it's your first time looking at the Hennessy Japan Fund, the Fund is actively managed and invests in high quality, globally oriented Japanese companies with a concentrated number of holdings that are limited to Masa and team's best ideas. On this video, Masa is going to recap some of the key events that occurred in the Japanese economy and markets in 2022 and will also provide his outlook on the Japanese market in 2023.

With that, we look forward to speaking with you about the opportunity in Japan. And thanks again for viewing the video. Now, I would like to turn it over to Masa Takeda, lead Portfolio Manager of the Hennessy Japan Fund.

Would you please discuss your thoughts on the Bank of Japan’s change to the yield curve policy? 

Masa Takeda

In December, Bank of Japan abruptly changed the yield curve control policy. Previously, it was pegged at 0% for the ten-year yields and it has been changed to 25 basis points to 50 basis points.

Because of this yield curve control measure, there was a decline in market functionality, lack of liquidity, as well as volatility. However, we do believe that there was another reason, which is the inflation. Due to Bank of Japan's strong commitment to the ultra low interest rate environment, we started to see widening of interest rate differential between the U.S. and Japan, which resulted in the weakness of the Japanese currency and through higher import costs, Japan's inflation started to pick up. 

Households are feeling the pinch because real wage growth is still in negative territory and therefore Bank of Japan, reluctantly decided to ease yield curve control measures so that they can allay concerns of the households.

What the government actually wants to see is for companies to start giving base salary increases to the employees, such that the real wage growth will finally turn positive. Now, spring wage negotiation season is coming up in Japan between large companies and the labor unions. And if we can see companies raising base salaries more than the current inflation rate, then we may start to see a positive cycle kicking in. We also need to see Japanese people accommodating this idea that inflation is here to stay so that people will no longer put off purchasing decisions in anticipation of lower price amid deflationary environment of the past.

Do you believe inflation in Japan will remain elevated?

Core CPI in Japan has been trending above 3% since last September, and that's been the highest in the last 40 years. We do believe that there are reasons to believe that Japan's CPI will continue to be elevated going forward, even though Bank of Japan still remains quite conservative that the current inflation environment is rather transitory.

Number one, price hikes by the companies due to higher import costs, as well as high energy costs, businesses are now passing on cost increases to the consumers. In addition to that, Japanese households are now going on revenge spending due to the belated reopening of the economy, and that will surely add to more pressure on CPI. In addition to that, thanks to the reopening of borders, inbound tourists, they are now coming to Japan in large numbers because of the currency depreciation.

In terms of the hospitality industry, because of the increasing number of inbound tourists, the number of people working in industry will not be enough. So the job market for the hospitality industry will become extremely tight, in our view, and that will most likely bring down the current unemployment rate from about 2.5% to 2.3%, which is full employment state of the economy.

Now if that is to happen, then that will pave the way for labor unions across Japan to negotiate for higher base salary increases, asking for more raises than the current inflation rate. 

And then, lastly, housing rents. Japan's property market, the housing rents, have barely moved in the last several decades. The question is, however, whether the wage negotiation can achieve increases that are higher than the current inflation rate. We are still a little bit skeptical.

Japanese companies have a rather unique labor practice system, where pretty much all employees are employed under implicit lifetime employment contracts. And, therefore, increasing the base salaries can significantly increase the labor costs for businesses. And that's why we think that the wage negotiation may prove to be a little bit difficult in the coming season.