Will Japanese companies raise salaries in line with market consensus?


23 Mar 2018


​In February, the Japanese market declined sharply, triggered by a sudden increase in market volatility, especially in terms of VIX-linked derivative trading, which created large financial losses. During the month, the market at times moved with a lack of direction, leading investors to shy away from investments.

Foreign investors sold heavily, whilst domestic investors and unit trusts bought into the market. This phenomenon raised suspicion as to whether Japanese companies will raise salaries by 3% in line with the market consensus on a year-on-year basis. Overall, the domestic economy appears healthy, however people remain uncertain regarding the country’s ability to rid itself of deflation fears.

In February, Prime Minister Abe re-appointed Governor Kuroda as the Bank of Japan’s chairperson for another five years, with the aim of achieving 2% inflation, which the Bank has been trying hard to reach over the previous term.

Tri Chemical Laboratories (4369 ) – one of the portfolio’s best performing stocks in February – develops, manufactures, and markets semiconductor and optical fiber materials. The Company also designs and manufactures containers for chemicals and further provides materials for Panasonic’s lithium ion battery. Small to medium wafer manufacturers such as Sumco, SK Siltron, and Wakka have recently increased their production, thereby generating more business for the Company, whereas large ones such as Shin-etsu have not scaled up their production so far. The Company currently trades at P/E 36x, PBR 8.3x, and ROE of 25.2%.

In February, the Japanese market was subject to fragile conditions for the first time in more than a year, threatening the “Goldilocks” market environment, which had continued for several months on the back of strong corporate earnings, stable inflation, low oil prices, an unbelievably stable currency market and a strong Japanese government.

This said, several of the above mentioned factors have changed since the end of last year; oil prices have risen and exceeded $65/bbl temporarily, the dollar has depreciated and finally, investors have started to worry about corporate earnings for the next fiscal year.

Domestic companies’ bottom line growth for the coming fiscal year is likely to be flat, if the dollar settles at around 105 against the yen. Major companies however forecast the dollar/yen exchange rate to reach 110-115, with the market currently discounting such macro changes. The Investment Adviser however believes that there are still companies that yield decent earnings growth regardless of the macro environment, and will continue to search for these in order to continue generating returns for the portfolio.

The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 09/03/18 and are based on internal research and modelling.