Announced salary rise an indication for future economic expansion in Japan?

BY MITSUHIRO YUASA

25 Apr 2018

BY MITSUHIRO YUASA

In March, the Japanese market declined, with President Trump’s worldwide trade sanctions dragging down market sentiment. Foreign investors turned to net buyers in late March, whilst domestic individuals turned to net seller.

The Yen’s sharp appreciation against the US dollar later in the month was perceived as a possible risk to the next fiscal year’s earnings by investors. Throughout the month, Toyota Motors decided to raise employees’ salaries by 3.3% during the next fiscal year, which was welcomed by the market as not only auto makers but other industries may follow suit. The Investment Adviser believes this move to be a sign of a potential future economic expansion in Japan.

Going forward, the Investment Adviser believes that the market may fluctuate in the short term due to increased uncertainty surrounding earnings’ projections for the new fiscal year, leading investors to take a “wait and see stance“. Foreign investors were major sellers during the first three months of 2018, whilst corporations and trust banks were major buyers of the market. In the Investment Adviser’s mind, corporate earnings for 2018 may be flat at best if the dollar/yen trades around the 105 level.

In terms of politics, the popularity of Abe’s cabinet declined sharply due to his and his wife’s scandals. The team still thinks however that he may be re-elected as the Chairman of the Liberal Democratic Party at the election in September. Governor Kuroda was re-elected as the Chairman of the Bank of Japan, continuing the current monetary policy.

The Investment Adviser continues to carefully watch both, the corporate earnings trend and the political situation, maintaining a portfolio of high conviction growth stocks.

Fringe81 (6550), which was added to the portfolio in February 2018, is a developer of internet advertising platforms and a marketing support company, which IPO-ed on the TSE in June 2017. The Company uses social network systems to deliver communication support and enhance hidden value in a company. One of the Company’s products, called “Unipos”, provides a platform through which employees and management can communicate with each other and which further allows a small financial bonus to be passed to others, called peer bonus (pb). Using this system, management can observe who communicates actively in a team or company as a whole and who does not. Fringe81 links this product with the company’s mission and values to enhance team building. The stock currently trades at P/E 112x and PBR 14.98%.

The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 13/04/18 and are based on internal research and modelling.