Q&A: WisdomTree's Jesper Koll

Q: How convinced are you by Japan's apparent economic revival?

A: For the past 30 years, Japan has been the sick man of Asia in many ways, but now that is starting to turn and old habits are being broken. For the first time in decades you've got the start of a domestic demand cycle with people's purchasing power and domestic spending increasing. The economy has just seen seven consecutive quarters of economic growth. Corporate earnings and the stock prices have been increasing. Unemployment is at an all-time low and you've got SoftBank absolutely dominating the global tech space with its Vision Fund.

Q: To what extent is the momentum attributable to Prime Minister Shinzo Abe's policies?

A: The government is not putting up obstacles like it did during the 1990s, but it's not just about policy. It's the fact that the private sector has de-levered and the recession is over. The important thing about the Abe administration is that it has been consistent and coordinated. Now you've got monetary, fiscal, and regulatory policy working together. And to be blunt, the driver for that is that Japan doesn't want to become a colony of China, which is going to get more and more competitive in high-value industries. That's why Abe and his team are focused on staying in the game and making this concerted push.

Q: So deflationary pressure is past?

A: The most important thing is that you've got nominal incomes and nominal pay now increasing for the first time in 25 years. That's progress, not deflation, because nominal pay in the US and Europe never declined after the global financial crisis, whereas in Japan, it did. Wage deflation has also come to an end. Now you've got wage growth running at 1.5-1.8% in nominal terms. A year ago, it was about 1%. So it's not a dramatic v-shaped recovery like you might see in India, but Japan is a different sort of story – it's steady as she goes. From 1995, wages and incomes declined by an average 1.5% every year, but now this is inflecting positively, and it's because of the changes in demographics.

Q: Is the aging trend in Japan positive for the economy despite the issues around labor shortages?

A: The labor market is tight because of those demographics, but that's also exactly why Japan is one of the few advanced industrial economies where the younger generations will be better off than their parents with better quality jobs and better income. The number of university graduates is dropping by about 10,000 every year, so starting salaries rose by almost 6% last year. That's a new middle class being built precisely because people in their 20s and 30s are scarce and becoming more valuable. Over the past 25 years, the only net job creation was part-time jobs and contract work. Now you've got leading companies like Toyota and Hitachi re-hiring part-time employees on a full-time basis. That is how a virtuous cycle starts, and you can see it in the private sector. 

Q: A recent Toshiba divestment is set to become Asia's largest-ever private equity buyout. How does this reflect Japan's economic traction?

A: Toshiba is interesting because it was the last zombie conglomerate without a proper business model focused on its core competencies and it symbolized the change in Japanese corporate culture. Japan used to be an insider's club and if you were not a member of that corporate family, you were really left in the dark. Now that cross-shareholding structure has been unwound, Toshiba is about 60% held by foreigners, and that tells you Japan is open for business. There's more corporate governance, capital stewardship, women's empowerment, foreign directors coming into play, and all the right things for non-Japanese to participate in the economy. All the right levers are being pulled.

Q: Does that mean that corporate Japan is going to sweat more assets?

A: The government changed the tax code last year to make divestments less punitive from a tax perspective, so I think there will absolutely be the occasional sale of one division or another from the large conglomerates. But it's the small to midcap Japanese companies that that are really exciting because that space is one of the best performing asset classes in the world. These guys tend to be at an advantage from a governance perspective because many of them are owner-CEOs, which makes aligning with shareholders more natural. There will always be divestments across the board, but the belly of the beast is much more interesting.

Q: What signals are you looking for to confirm that Japan's growth trend will continue?

A: One thing you want more of is some of the on-shoring we're starting to see such as Shiseido's announcement that it will build a new cosmetics factory here for the first time in 40 years. When multinational corporations add new capacity to the domestic economy, it gives you confidence that it really is a self-sustaining cycle. One area where Japan could definitely do more is cutting red tape and empowering young entrepreneurs more aggressively. If Japan could establish special economic zones, it could relieve that regulatory burden on new technology companies.  

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• Topics
• North Asia
• Advisory
• Japan