Yahoo Finance Japan Consumer Stocks to Get Boost as Wage Increases Kick In
(Bloomberg) -- Japan’s lagging consumption stocks will likely get a boost in the second half of the year, as signs of recovery in spending due to wage hikes kick in, according to some investors.
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That’s expected to be a tailwind for domestic demand-focused sectors including food and retail, said Nozomi Moriya, Japan equity strategist at UBS Securities. Those sectors are among the smallest gainers on the Topix index so far this year, with the Topix retail gauge rising 8.8% and food firms climbing 7.9% at a time when the broad market advanced 22%.
“The recovery in consumption is really what we are waiting for,” said Moriya. “When consumption finally recovers, sectors that are lagging behind will catch up with the rest, and it will have an upside impact on the market.”
Japan’s annual wage negotiations earlier this year concluded with strong gains, but expectations of higher spending haven’t been priced in yet. Furthermore, companies that haven’t raised paychecks in a long time are taking time to do so, according to Tomo Kinoshita, global market strategist at Invesco Asset Management Japan.
A recovery in consumer stocks will provide another boost to the broad-gauge Topix, which is trading at a record, led by financials on prospects of the Bank of Japan raising interest rates. Strength in domestic demand will be one of the next drivers for the market, which “could materialize in late July to early August or later,” Citigroup Inc. strategists wrote in a report last month.
However, the weakness of the yen — which slumped to a 38-year low this week — remains a risk that could prolong inflation and undermine the upside potential of consumption stocks. The BOJ’s latest Tankan survey showed confidence among retailing firms sank, even as sentiment among large manufacturers improved. Household spending in May edged down 0.3% from the previous month, missing the consensus forecast of a 0.3% increase.
Consumer spending at this point in time is still below expectations, said Christy Tan, investment strategist at Franklin Templeton Institute, “but that shouldn’t be a huge deterrent.” Tan said on top of real wage increases, valuations of consumer discretionary and staples stocks are below the 10-year average, providing an attractive entry for investors.
The continued strong inflow of tourists could also spur sales. In the first quarter of the year, tourists spent a record ¥1.75 trillion ($10.8 billion).
Hiroshi Matsumoto, a senior client portfolio manager at Pictet Asset Management, said that the retail sector is “in the most challenging situation right now” due to rising costs from the weak yen. “But from here on there may be some encouraging signs in the sector in the second half of the year as real wages increase.”
(Updates with May household spending figure in sixth paragraph.)
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