A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

August 25, 2014

Japan, Inc: still looking for the "wage surprise"
GDP, CPI and Real Wages, June 2013 – June 2014


Source: Bloomberg, as of 8/20/14. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line:

  • Investors continue to pore over economic figures, seeking signs that Abenomics is improving Japan’s prospects for growth.
  • One key factor: growth in domestic consumption. To get Japan buying again, it’s clear that real (inflation-adjusted) wage growth will have to resume—something that Prime Minister Shinzo Abe had hoped would be the economic "surprise" of 2014.
  • Nonetheless, while Abenomics has seen some success since it was initiated in December 2012—like reversing deflation and sparking a stock market rally—sustained real wage growth is not yet one of them; and the sharp decline in 2Q GDP has only increased skepticism about economic policy in some circles.
  • But the second quarter GDP decline was largely a function of the surge in the first quarter, both related to this year’s consumption tax hike—and that makes progress difficult to gauge—at least temporarily.
  • The surge in 1Q GDP growth occurred because consumers made purchases of big ticket items in advance of the consumption tax hike from 5% to 8% in April – in effect, borrowing growth from the subsequent quarter.
  • Not surprisingly, consumption then fell sharply in the second quarter leaving GDP at a lower level than at the beginning of the year.
  • Meanwhile, consumer price inflation immediately spiked as the tax hike started to bite, but was otherwise stable—and inflation expectations have actually been falling in recent weeks, as the increases have been taken on board.
  • But despite the unsettled economy, Japanese equity prices as measured by Japan’s Topix Index have turned in very solid results over the past few months—fully reversing the year’s earlier declines; perhaps investors switched their focus from uncertainties about the impact of the tax hike to a new all-time high in corporate profits and continued strong growth in corporate earnings and dividends.
  • However, the jury is still out on whether this recent rebound in stock prices also contains an element of optimism about a sustained future recovery—if so, then progress on the real wage front will probably need to be visible before too long.

The Chart:

  • The chart shows the annualized quarterly growth rate of Japan’s GDP, the year over year rate of consumer price inflation and the year over year change in real wage growth over the past two years.
  • GDP growth slowed during each successive quarter of 2013. But in the first two quarters of this year, that growth was whipsawed – up 6.1%, then down -6.8% – due to the increase in the consumption tax.
  • Consumer price inflation has been positive on a year over year basis since June 2013, but the big jump recently corresponds with the tax hike—a one-time effect that will not affect the year-over-year calculations to be made in April 2015.
  • Real wage growth has been negative over the past year and the jump in inflation due to the tax hike especially hurt in the past few months, but real wage growth was less negative in June than in May or April.

Context & Perspective:

  • Abenomics is the name given to the economic policies of Japanese Prime Minister Shinzo Abe who was elected on December 16, 2012.
  • Abenomics aims to revive Japan’s economic growth with a three-pronged strategy: monetary easing, flexible fiscal policy and structural reform.
  • The first two of the "three arrows"—aggressive monetary easing and flexible fiscal policy—are credited with reversing deflation, weakening the currency, lifting corporate profits, improving sentiment about the economy and sparking a significant stock market rally in 2013.
  • The third arrow—structural reform—involves implementing a set of policies to promote private investment and productivity growth. Stronger wage growth and more domestic consumption are likely more dependent on the success of this part of the strategy, which will be more difficult to implement because it is much more complex and politically sensitive.
  • In January 2014, Abe wrote an editorial saying he was hopeful for a "wage surprise" in 2014 that would be aided by that third arrow, but also by a shared national consensus that the government, major industries, and organized labor would work together to increase wages and bonuses and enable incentives to boost productivity. Only time will tell how many of those will come to pass.


Abenomics: Series of policies enacted after the election of Japanese Prime Minister Shinzo Abe on December 16, 2012 aimed at stimulating Japan’s economic growth. Abenomics is a three-pronged strategy: monetary easing, flexible fiscal policy and structural reform.

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

Consumer Price Indexes (CPI) measure the average change in consumer prices over time in a fixed market basket of goods and services.

Tokyo Stock Exchange Index (TOPIX) is a market-capitalization-weighted index of over 1,100 stocks traded in the Japanese market.

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Previous Editions

Click on a date to view that week's edition of charts.


Which Asian country will have the strongest growth in the coming year?


Which Asian country will have the strongest growth in the coming year?

Japan, as Shinzo Abe's policy initiatives take hold
India, as Narendra Modi's new government enacts changes
China, as Xi Jinping's reforms promote a stronger financial sector
South Korea, as President Park Geun-hye's plan to boost growth bears fruit

Previous month Poll

Go for growth: Where will a global recovery be strongest this year?

Europe, as countries emerge from bailouts
US, as consumers regain optimism
Japan, as stimulus programs begin to bear fruit
China, as reform and pro-growth policies continue