One anecdote summarizes a key lesson on the inflation and wage front: in a meeting with an executive from one of Japan’s largest food producers, we heard that a recent major price increase on dairy and chocolate went much better than expected – while the company was expecting decreased volume after the price hike, volumes didn’t drop at all.  The company is now planning a second round of price increased.  In our view, this anecdote suggests that an inflationary mindset is starting to permeate Japan.  This mindset is positive for Japan because the major economic issue of the last two decades has been lack of inflation and its concomitant depression of consumer spending: as one of our Japanese strategist friends mentioned to us, soda prices in vending machines in Tokyo are the same as they were in 1997! 

Of course, price increases won’t be digested well if wages aren’t also improving.  One large discount retailer with whom we spoke raised wages by 6% over the past year and has still had difficulty finding enough talented associates to hire.  In speaking with two major employment agencies, we heard repeatedly that the job market remains strong.  One particularly encouraging data point is that staffing needs for full-time employees is finally starting to improve along with temp and part-time workers.  Also, job turnover related to “proactive job changes” is growing rapidly; this is notable because it represents a refutation of Japan’s traditional “one employer for life” culture.     

David Fuller's view

Here is a PDF of The Weekly View.

This may raise eyebrows among a few subscribers but Japan has been trying to create some inflation for over two decades, such has been the deflationary pressure.  This kept investors in JGBs rather than the stock market and hit consumption on the expectation that prices would fall further.  The government is trying to reverse this cycle as part of a sustainable economic recovery.

Could Shinzo Abe’s Government succeed?  Yes, given their pro-growth policies and because at the first clear evidence of inflation Japanese 10-Yr Government Bonds will lose their appeal, having fallen to a yield of 0.2% early this year.  Technically, we saw sharp JGB rallies commence in October 2010 and April 2013.  This year’s pattern is different, being far more gradual, but JGBs are probably establishing another higher reaction low at this time in what looks like base formation development.

(See also Monday’s comment on Japan’s stock market.)