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Japan Emerges From Its Deflation Slumber - Good News For Wealth Creation - Julius Baer Study

Tom Burroughes

14 November 2014

Japan is primed to emerge from its deflationary slumber and enjoy wealth creation, according to an inaugural report on the country by Julius Baer, the Swiss bank that has dubbed Asia as its second home market.

The initiative of improving economic linkages in the 10-country block of ASEAN nations of the Southeast Asia region by the end of 2015, coupled with measures by the Japanese government of Shinzo Abe to revive its economy, offer an escape from a multi-decade deflation era for Japan, the study said.

Following a report on Asia and other regions published in recent weeks, the Zurich-listed bank has issued its Wealth Report: Japan, which is a 69-page study of economic and wealth creation prospects in Japan, as well as survey of price trends faced by Japanese in the luxury goods area.

“Ongoing domestic structural growth factors heralded by `Abenomics’ and stronger integration with the ASEAN-4 nations are keys to the revitalisaton of Japan’s economy and its consequent escape from its deflationary legacy,” the report said. (The ASEAN-4 nations are Thailand, Malaysia, Indonesia and the Philippines.)

The report highlights how Western private banks, while they have found Japan a challenging market in which to operate in recent years, still realise that such a large economy represents a potential goldmine. Japan, the world’s second-largest economy, accounts for about half of the Asia region’s cohort of high net worth individuals – there are more than two million of such persons, the Swiss bank said.

In Julius Baer's own case, this bank in January 2013 undertook a 60 per cent equity stake in TFM Asset Management, which is a Swiss-registered independent asset management company founded founded in 1996 and has offices in Tokyo and Zurich.
Much of the report examines Japan’s renowned recent history of deflation and slow growth, but puts the country’s experience into context, noting that since 1960, major economies have been through more than 60 deflationary episodes.

Recently, since the Japanese yen depreciated in 2012, Japanese companies – many of them exporters – have logged an earnings surge, said, noting that in yen terms today, Japanese firms have seen the kind of profit performance since 2007, before the global financial crisis.

“Put differently, in the corporate sphere, Abenomics has already achieved what took much longer to deliver under far more favourable circumstances one decade ago. Given the scale of this achievement, we return to our earlier point that rising real wages in Japan are a case of ‘when’ and not ‘if’, which in turn will cement the end of the deflationary period,” the bank continued.

As far as the ASEAN-4 countries are concerned, the bank said, based on IMF figures, that these countries’ collective gross domestic product has risen to almost $1.9 trillion, a rise of almost three times. In per capita terms, average income in the four countries is over $4,000. “Such increases, if sustained, mean that the ASEAN–4 in particular are nearing the ‘take off’ stage in terms of private consumption. If per capita incomes continue to rise at such rates, the opportunities for Japanese businesses to continue to expand their presence and gain new customers in the ASEAN–4 are compelling,” the report continued.

Julius Baer referred to previously published research it has done showing that by next year, the ASEAN–4 would be home to over 300,000 HNW individuals, representing a compounded average annual growth rate of 21 per cent. Indonesia’s growth rate of wealthy individuals surpasses even that of China, at 24 per cent, over the period 2010 to 2015.

“We believe the ASEAN–4 are on track to meet these forecasts, if not to exceed them well into the medium term,” it said.

Life of luxury
Julius Baer has recently expanded its coverage of the luxury goods/services field to track the costs high net worth individuals face. In local currency terms, the average price rise for the Tokyo subset of the Julius Baer Lifestyle Index rose 1.6 per cent this year, while the subsets for Singapore and Hong Kong have fallen. Luxury property prices have risen by 11 per cent since 2013, but fell 15 per cent in Hong Kong, for example.

Among other details, the index shows that education-related components, such as tuition fees at university and boarding school fees, have consistently shown double-digit rises since 2011.