For GM, which is worse—the recall or a weakening yen? (Part 7 of 12)
Low inventory—reflecting strong growth or tax hike fears?
The below graph reflects the quarterly change in Japanese inventories (in yen) through 2012. As inventory changes have been negative and declining recently, these changes are reflected in the graph here as deductions to overall gross capital formation. Despite inventory declines, gross capital formation has been extremely strong, and the Japanese manufacturing base is running on a historically lean level of production capacity. This would suggest that 2014 could be another good year for corporate profits in Japan, although consumption tax hikes could disappoint retail sales as the year progresses. This can mean slower sales in Japan for Toyota (TM), although the 2.1% average wage growth should mitigate the 3% increase in the sales tax this year.
For more detailed analysis of the overall Japanese economy, read Bank of Japan Tankan supports a 2014 equity rally in Japan.
Japan’s 2014 consumption tax hike—a near-term negative for Toyota?
It would appear that the Bank of Japan (BOJ) would first like to see what develops with regard to inflation and economic growth over the course of 2014 in Japan before deciding future action on its aggressive monetary policy. With consumption taxes rising from 5% to 8% this April, and up to 10% in October, 2015, the BOJ would like to see how the economy pans out first, after the first round of tax changes. Such actions would probably be prudent. The Bank of Japan does not want to inadvertently cause a collapse of the currency, a collapse of Japan bond holdings, and sharply higher interest rates. A 45% of GDP is enough liquidity facilitation for now.
The post-2012 pick-up in profits and investment data may be progressing at a good rate and reflect a good, sustainable trajectory for achieving 3% to 4% nominal economic growth in a 1% to 2% inflation environment. In the long run, this aggressive monetary policy should further support the yen’s weakening and growing exports for Japanese exporters like Toyota (TM), although the near-term economic impact can lead to a weaker domestic demand. As a result, the above graph reflecting low inventory can reflect that manufacturers in Japan are braced for a near-term decline in sales as the sales tax increases are rolled out. However, if the 2.1% wage growth slated for 2014 offsets most of the 3.0% sales tax increase as the year progresses, Japan could see a surprise to the upside in terms of sales and profitability.