Japan has increased its consumption tax from 5% to 8% starting this month, the first such increase in 17 years. This is the latest and, as many believe, the most radical of Japanese Prime Minister Shinzo Abe’s economic decisions since he assumed office in 2012. Collectively known as Abenomics, Abe’s economic policies have thus far reinvigorated Japan’s flagging economy.
Need for a Consumption Tax Hike
A series of tax increases has been outlined by a legislation passed in August 2012. The first of these has already come into effect, raising the consumption tax from 5% to 8% starting this month. The second increase, slated for October 2015, will increase the rate to 10%.
The current increase is a move targeting at meeting rising social security costs for the country’s aging population. Japan has a massive amount of public debt, amounting to 240% of its GDP. The increase aims to raise tax revenues by ¥4.5 trillion ($43.6 billion) in the current fiscal year. This is almost 1% of the nation’s GDP.
Impact on Consumption
Several analysts are of the view that the increase will impact consumer spending negatively. This is borne out by increased buying behavior witnessed last month, an attempt to stock up before the tax comes into effect.
Japan has faced years of deflation and this has made consumers unwilling to increase spending. In fact, one of Abenomics’ key targets is to increase consumer spending in an effort to energize the economy and consequently increase inflation.
According to a Bank of Japan survey, inflation has now increased. However, it is expected to remain below the targeted 2%, given the rise in consumption tax.
Growth and Government Intervention
The legislation related to consumption tax increases also states that the government aims to achieve nominal growth of 3% and real growth of 2%. Already there is speculation that the next tax increase may not take place if the hike’s effect is too detrimental.
Several economists are of the view that the country’s economy may suffer a contraction due to the tax increase. However, they also believe that this will result in a slowdown at worst -- not a recession -- and growth will be on course soon.
The Japanese Prime Minister has been making efforts for a long time to bring about an increase in wages. Salaries increased for the first time in nearly two years this January.
According to the Ministry of Labor, base pay -- excluding bonuses and overtime -- increased by 0.1% for part-timers compared to a year ago. This is primarily a result of a shrinking labor market, which in turn is an outcome of Japan’s aging population. It is only a matter of time before the labor market for full-time workers also tightens. This will support the current increase in inflation and keep the economy on track.
Below we present three Japanese stocks which possess the potential to grow appreciably, each of which also has a good Zacks Rank.
Toyota Motor Corporation
Toyota (TM - Free Report) has three business divisions: auotmobiles, finance and another segment focusing on housing, information and communications. In the first nine months of fiscal 2014, operating net cash flow improved to ¥2,727 billion ($27.3 billion) from ¥1,746.2 billion ($21.6 billion) recorded in the year-ago period.
The company’s operating income is expected to rise 81.7% year over year to ¥2,400 billion ($24 billion) in fiscal 2014.
Toyota holds a Zacks Rank #2 (Buy) and has expected earnings growth of 62.70%. The forward price-to-earnings ratios (P/E) for the current financial year (F1) is 9.44.
Honda Motor Co., Ltd.
Another automobile major, Honda (HMC - Free Report) , is our second choice. Honda’s has various business divisions dealing with motorcycles, automobiles, financial services and power products. For fiscal 2014, Honda has projected revenues to increase 22.5% to ¥12.1 trillion ($121 billion).
Operating income is expected to surge 43.2% to ¥780 billion ($7.8 billion) and net income is anticipated to jump 58% to ¥580 billion ($5.8 billion) or ¥321.81 ($3.22) per share.
Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 51.20%. It has a P/E (F1) of 10.77.
Kyocera (KYO - Free Report) primarily caters to the information and communications market. The company manufactures, sells and distributes industrial components, and telecommunications and information equipment worldwide. Kyocera has expanded its business by effectively developing and applying its ceramics technologies. The company’s materials, components and finished products are used in virtually all fields of industry
Apart from a Zacks Rank #2 (Buy), Kyocera has expected earnings growth of 20.00%. It has a P/E (F1) of 19.59.
Prime Minister Abe’s latest move, aimed at curing the public debt situation is being viewed as one which could damage the rosy growth situation. However, it is a necessary measure, given the delicate nature of the fiscal situation. Given the recent strength of Japan’s economy, it is unlikely to have a lasting impact. This is why these three stocks would be prudent choices for your portfolio.