In part due to Abenomics, Japanese companies care even more now about corporate profitability and shareholder returns; a “show me the money” kind of corporate governance, according to John Vail, chief global strategist at Nikko. “The dividend paid by TOPIX is surging upward and we expect it to double in the five years from 2013 through 2018,” he said.
Even though GDP growth has remained subdued, profit margins have surged. Japan’s corporate profits can rise sharply due to productivity increases and gearing to global growth via multinationalization, as Japanese corporations are continuing their structural shift towards improving profitability, said Vail.
“Since the Koizumi era, Japan has embarked on major rationalizations in most industries, with the number of players often reduced from seven down to three. The fruits of this restructuring were slower to ripen than in Western world examples, and they were hidden by a series of crises (the Lehman shock, the turbulence in China, the strong Yen and of course, the Tohoku crisis), but since Abenomics began, the global backdrop for Japan has been stable and there have been no domestic crises, thus allowing the fruits to ripen,” said Vail.
Meanwhile, Japan’s overall corporate profit margin is unlikely to reverse soon on a four-quarter basis, in Vail’s view.
And even if Japan’s nominal GDP growth is fairly subdued, Japan’s services sector profitability has been very strong despite weak GDP and that is expected to continue, so weak domestic GDP statistics should not concern investors much, according to Vail.
In fact, the profit margin of services industries also surged to a new record high. Normally the service sector would be hit the most by weak domestic GDP, and this should lessen investors’ concerns about Japan, noted Vail.
Moreover, while poor demographics can be linked with poor GDP growth, Japan with its strong automation and efficiency capabilities will likely continue to offset this, said Vail.
