A race against time

Swift actions were the approach Prime Minister Fumio Kishida took after assuming the leadership role¹. From calling a snap election to the size of the economic stimulus package, his decisions seemed like a race against time. So far, they have exceeded market expectations.

“The time to repair the roof is when the sun is shining,” said the prime minister before unveiling the ¥55.7 trillion (US$490 billion) stimulus package² to boost Japan’s pandemic-battered economy. The package consists of aid for hospitals and struggling businesses; and investments to execute its growth strategy.

While the economic stimulus may pack a punch in the near term, paving the way for a rebound in consumer spending also requires the easing of coronavirus restrictions and high vaccination coverage. Japan’s full vaccination rate of 79%³ is currently among the highest in the world.

Prime Minister Kishida promised to make plans for new “Go To” campaigns to drive consumption but cautioned on the possible resurgence of coronavirus infections. The Go To Travel campaign, launched previously to subsidise domestic travel expenses, is designed to improve nondurable and service consumption.

Recovery in tourism: A question of when, not if

So, what about international travellers?

Late last year, Japan eased its entry rules for business travellers and students⁴ in a step towards reopening its borders. However, the government backtracked on its decisions following the emergence of the Omicron coronavirus variant. The announcement was a bitter pill to swallow, particularly for the airline industry and

travel-related businesses, as the country’s borders have been closed to international travellers for most of the pandemic.

On the bright side, we observed that some parts of the world, where travel had reopened, saw strong economic recoveries thanks in part to pent-up consumer demand. In the case of Japan, a recovery in tourism is not so much a question of if, but when. The country remains one of the world’s most desired leisure travel destinations, while its capital is recognised as a key centre for business.

In 2019, before the pandemic, international visitors to Japan rose to a record 31.9 million. That year, the travel and tourism sector, which also benefitted from China’s tourist boom, added US$359 billion to Japan’s gross domestic product.⁵

A revival in travel demand can have a powerful ripple effect, carrying broad economic benefits. It creates the need for a range of goods and services and helps drive jobs growth across a variety of industries. Potential beneficiaries include aircraft parts manufacturers, jet engine makers, hotels, and restaurants.

A new form of capitalism

Investors were initially spooked by Prime Minister Kishida’s proposal of a new form of capitalism as he vowed to create “a virtuous cycle of growth and distribution”. The key question is whether this proposal encourages enough profitable opportunities in key growth areas (such as digital transformation).

With his eyes set on supporting the middle class, the prime minister has been trying to persuade businesses to raise wages. He called for a 3% or more salary increment by companies that have seen earnings recover to pre-pandemic levels. The sense of urgency comes as Japan’s average annual real wages increased by a mere 4.4% from 1990 to 2020 (adjusted for purchasing power parity).⁶

In the past, initiatives such as tax cuts and work style reform or involvement in wage bargaining were introduced in an attempt to reduce income disparity in Japan. These may help at the margin. But continued labour market reform that encourages broad merit-based pay across jobs and a more flexible labour market could be more effective.

Higher tax rates for corporations and on dividend income and capital gains could be part of the government’s future plans to address income stagnation and fund additional transfers to low-income households. These policy changes are unlikely to happen soon but are something we should keep monitoring. How much of an impact any potential tax hike has on company multiples depends on whether it is balanced by successful pro-growth measures.

 

1. Fumio Kishida was elected as Japan’s new prime minister on 4 October 2021.

2. Japan’s stimulus package consists of cash handouts to low-income households, aid to struggling businesses and subsidies for domestic travel. Including funds from the private sector, the overall package will likely amount to ¥78.9 trillion. Source: JapanGov, the government of Japan

3. As at 24 January 2022. Source: Our World in Data

4. The Japanese government relaxed its entry rules in November 2021, capping the daily visitor numbers at 5,000 per day.

5. Sources: Japan Tourism Agency, Japan External Trade Organization

6. Japan’s annual real wages increased from US$36,879 in 1990 to US$38,515 in 2020. Source: Organisation for Economic Co-operation and Development (OECD)

 

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