As Japanese Prime Minister Shinzo Abe heads to the United States this weekend, the Nikkei stock exchange has provided him with a triumphant talking point. When he visited the New York Stock Exchange in 2013, he urged traders to "buy my Abenomics" -- and buy they have. The Nikkei, which closed above 20,000 earlier this week, has roughly doubled since the start of Abe's premiership in late 2012.
The question now is whether Japanese corporations can produce the profits to sustain the rally. There's reason to expect they can. But they would have an easier time of it if they followed the example set by Sony's ambitious CEO Kazuo Hirai.
Until now, Japan's stock surge has been driven by monetary policy, the product of what Stewart Richardson of RMG Wealth Management calls the "QE trade." The trillions of dollars the Bank of Japan unleashed via quantitative easing boosted equities, with an assist from public entities like the $1.1 Government Pension Investment Fund that were prodded by the government to buy shares. As Richardson tells Bloomberg News, central bank and public stock purchases are "putting an underlying bid on the market" and more investors can be expected to follow the herd to Tokyo.
That's not to say Abe hasn't given investors reasons to be optimistic about the Japanese economy. He has augmented the government's stock-boosting policies with efforts to encourage companies to tighten governance, hire more women and increase wages. By joining the U.S.-led Trans-Pacific Partnership talks, Abe has put some of Japan's most entrenched interests, like those in the agriculture sector, on the defensive. The yen's 30 percent drop has also touched off a boom in tourism, particularly among China's nouveau riche.
Meanwhile, the exchange rate is propelling corporate profits to all-time highs. Earnings of the nearly 200 companies that were Nikkei members back in 2000 totaled an estimated $139 billion in the fiscal year that ended March 31 -- a huge increase from $67 billion in 2013 and $49 billion 2012. Estimates for this fiscal year put Nikkei profits at $160 billion.
But Japan's corporate leaders -- and their investors -- should tread cautiously. The Nikkei's gains are now running ahead of both corporate and broader economic fundamentals. Wage gains remain stingy, a sign Abenomics is boosting little more than asset prices. In March, household spending dropped 2.9 percent from a year earlier, the 11th straight monthly decline. Exporters face increasingly grim prospects as China slows, U.S. growth underwhelms and European faces another round of its euro crisis.
To catch up with the Nikkei, companies need to reduce bloat, improve transparency, and focus on their core competencies. They should also upend the traditional hierarchical management structures that often prevent good ideas from getting to company leaders.
Sony is a great example to follow. Unlike its longtime competitors Sharp -- which now finds itself angling for government aid -- Sony is now enjoying the fruits of restructuring. In recent years, Hirai exploited the cushion afforded by the weak yen. This wasn't just a matter of cutting costs. Hirai sold Sony's personal-computer business, overhauled its TV operation, and pruned its smartphone lineup. He also moved some operations outside Tokyo to save on rent and focused more closely on China as an export market. Now Hirai is focusing on mentoring the next generation of designers and programmers, and encouraging them to dream up the industry's next game-changer.
There are clear benefits to prioritizing innovation and competitiveness in this way. This week, Sony raised its profit forecast for the second time since February. Its annual earnings more than doubled to $567 million in the fiscal year that ended in March, compared to the $393 billion analysts expected and more than triple its February forecast.
If more companies followed Sony's lead, Abenomics would have better odds of succeeding. A thriving corporate sector would create the jobs, higher incomes and new economic frontiers Japan has been lacking for two decades. And Hirai has proven it's possible to initiate big changes in corporate Japan, even when a weak yen, and a surging stock market, have taken the pressure off.
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