As was mentioned here yesterday, and got further elaborated on by Bloomberg today, Japanese capital expenditure, CapEx, or investments by companies that have a rather direct link to increased sales, grew by 5.5% YoY in the third quarter of 2014, on expectations for 1.8% increases and with a prior value of 3.3% growth in the first quarter. Overall, it represented 9.4 trillion yen (around US$80 billion) of investments.
Manufacturing, machine tools producers, and IT equipment producers really stepped up, at 11, 15 and 26 percent respectively, while non-manufacturers represented the major below-average pace block of companies at added 2.7% investments (still far above the 1.8% average projection!). As could be estimated from the construction data released on Friday, real estate spending is in good shape (up 56%!), as is – surprisingly enough – retailing and wholesaling spending at 11%.
Overtime pay however was up 0.4% YoY in October, with a revised September YoY growth of 1.9% according to Market News International. Other interesting data was that bonuses were up 6%, full-time employment up 1.5% YoY in a strong increasing trend, and part-time workers up 1.7% but in a downwards trend. Together with strong employment data overall, it seems like more people are getting hired full-time, something that Abe Shinzo has acknowledged needs to happen to a much greater extent. In real terms, wages are still down significantly, at -2.8% YoY.
The chances are that this will change, though. Corporate profits were up 7.6% off sales/revenue increasing by 2.9% in the quarter on YoY terms, while the USD/JPY average rate had increased by about 4% in that period YoY. Thanks to not all business activity being conducted in or off the foreign markets (it’s very roughly 25% of the economy on an annualized basis) and there being a trade deficit, it can be said that Japan looks like it has gained better structural profitability in the last reported quarter. Exporting companies might still see a gain due to the lower input prices (yay for commodities being down) and the 10-15% drop in the yen after Kuroda and the BOJ decided to pump more money into the economy. Chances are that December bonuses will be up significantly YoY, which should really help the velocity of money if people see their pay check increasing in real terms and there won’t be a tax hike next year to drive optical inflation, meaning that there won’t be that big of a need to hold back on spending , either for consumers or business.
Looking at the broader picture then, does Abenomics look more like a success or a failure in the light of this data?
First, there is obviously the decrease in real wages that has happened, and makes people’s paychecks less relative to the goods they buy. Then there’s the corporate profits increasing and general housing/construction market being a lot hotter again. So… sums? The Japanese seem to be 37-30-34 split on favourable-unfavourable-indifferent in their views of the economic gains from Abenomics, how come it looks this good?
- Wages being down in real terms is really not the inflation driver I prefer, but better have some inflation than none in Japan’s case. The good thing here is that employment is up, although largely in part-time and temporary work, but I would argue that it really improves monetary velocity if people outside the job market get a pay check and work experience in their hands, which will allow them to both spend now and increase their employability in the future. Getting them into full-time work after this is the next stage, and the data seems to point towards this being the case.
- Lots of Japanese have illiquid assets like housing or longer-term (FX) deposits, and these increasing in value are obviously good for the feeling of wealth among the Japanese. Suddenly seeing your housing go from a liability and massive debt burden on your shoulders for the last 20+ years, and recently being able to look at it more like a pot of gold? Does wonders for sentiment and confidence, at least!
- Japan is largely a rather egalitarian society, which premiers savings to an incredible extent. Lots and lots of people have a lot of savings in normal assets or in some sort of social security fund. Any gains in equities probably reflects rather more on the total account balances for a majority of Japanese than in the more highly concentrated markets elsewhere. If they’d wish to exit their bond holdings or other very safe funds, then the bond prices will at least give them better nominal values than they were bought for, and efforts like the JPX Nikkei Index 400 together with increased profits look set to make equity a whole lot more attractive to hold.
These factors just might spur monetary velocity, and the current election campaigning will hopefully outline a little more of what Abe hopes to accomplish with his grab for consolidated power within the LDP. December data and developments will really be worth watching to see if companies are getting serious on paying off workers better, getting new full-time hires on board, and investing deeper in the Japanese economy to get the capital out there working.
What speaks against this thesis is that the major industries seeing increased investments are those that target exports to a large extent. Manufacturing is obviously to a large extent cars, machine tools is a large sector of real importance that Japan has world-leading technology in and great brands for, while IT is another area where you can probably riff off a few conglomerate names just from memory. The lowered yen will really make Japanese goods more competitive in the former and latter sectors, while it might simply just increase the profit margin rather than total US$ turnover on the machine tools. The reason is that the majority of Japanese machines are either highly specialized or ultra-high performance, normally priced so much above the competition that a 20% drop in US$ terms (and much less in euro, GBP, AUD, etc. term) is unlikely to make a whole lot of difference. 3-5x pricing means that a 10-20% discount is nice, but it probably doesn’t make a difference on final project IRR decisions.
Abenomics still needs to get at the consumer spending side of the equation to make the increase in capex spread and really take root, not just in exporting industries but in the domestic economy. I will be very much interested in the information that will come out of Japan in the coming two weeks.