Japan-Weekly Strategy Report “Possibility of both price and wage increases, acceleration of inbound consumption” October 26, 2022 198

Report type: Weekly Strategy

“Possibility of both price and wage increases, acceleration of inbound consumption”

The dollar-yen exchange rate exceeded 150 yen per dollar for the first time in 32 years in overseas markets on 20/10. At the same time, RENGO (Japanese Trade Union Confederation) announced that in next year’s spring labor offensive, it will demand a 5% wage increase, the highest level in 28 years, including a uniform base salary increase and regular salary increases.

In August this year, the year-on-year rate of increase in the monthly labor statistics/total cash payrolls, and the national CPI (excluding fresh food and energy) was 1.7% (up 0.4 points from the previous month) and 1.6% (up 0.4 points from the previous month) respectively, showing signs of hovering around 2%. In the 11 October, 2022 issue of this Weekly’s “Corporate Price Outlook in the BOJ’s Tankan”, we had shown the outlook for price increases in one, three, and five years, as well as sales price forecasts with growth rates above those rates. At a discussion session in Washington, D.C., on 15/10, BOJ Governor Kuroda emphasized his stance to continue large-scale monetary easing to support the economy, saying that “price increases in Japan are temporary because they are not accompanied by wage increases”. This in turn implies that an “exit strategy” to reduce monetary easing will be considered when rising prices are accompanied by rising wages.

If the weak yen boosts inbound consumption by foreign visitors to Japan, encourages factory production to return to Japan from China, and accelerates the rate of increase in wages and prices, a major trend in the stock market will naturally take shape in the not-too-distant future, centering on exit strategies. At that time, a strong market can be expected, especially for megabanks and other banking stocks.

Even for inbound-related stocks, the share prices of airline and electric railway stocks, which are regarded as the main focus of market trading in this sector, are still left at low levels compared to 2019, before the spread of Covid-19. Looking at the closing prices on 20/10 on a relative index basis with the end of 2019 as 100, Japan Airlines (9201), ANA Holdings (9202), JR East (9020), and JR Tokai (9022) are all still in the 80-84 range. The July-September 2022 financial results of the three major US airlines (American Airlines, United Airlines, and Delta Air Lines), which are spearheading the recovery of the economy, show that the number of people who flew exceeded that of the same period in 2019. On top of that, a further increase in demand is expected from individuals who have been holding off on travel due to the spread of Covid-19. In this regard, there is little basis for assuming that the stock prices of major domestic air and electric railway stocks will catch up only to the levels at the end of 2019.

At the Communist Party Congress, held once every five years in China, President Xi Jinping strongly restrained Taiwan and the US by stating that he would “never renounce the use of force” over the unification of Taiwan. Being wary that 2027, when President Xi’s third term in office will end, will be the 100th anniversary of the founding of the Chinese People’s Liberation Army, the Biden administration has accelerated the provision of arms to Taiwan. As a result, amongst Japanese equities defense-related stocks may become more prominent.

In the 24/10 issue, we will be covering Kitoku Shinryo (2700), Alpen (3028), Serverworks (4434) and Japan Airlines (9201).


Kitoku Shinryo Co., Ltd (2700)          5,010 yen (21/10 closing price)

・Opened in 1882 in Kabuto-cho, Nihonbashi, as Kimura Tokubei Shoten, a rice dealer. Operates four businesses, namely, rice business, which makes and sells milled rice and brown rice, feed business, egg business, and food business, which manufactures and sells rice flour, processed foods, and other products.

・For 1H (Jan-Jun) results of FY2022/12 announced on 9/8, net sales decreased by 0.9% to 53.944 billion yen compared to the same period the previous year, and operating income increased 2.1x to 810 million yen. In the rice business, there were strong sales to convenience stores and a pickup in eating-out demand, but domestic rice transaction prices fell and sales to household products at mass merchandisers were weak. Improvements in inventory and purchasing had successfully resulted in profits.

・For its full year plan, net sales is expected to decrease by 4.5% to 103.0 billion yen compared to the previous year, operating income to increase by 90.0% to 1.0 billion yen, and annual dividend to increase by 10 yen to 60 yen. Purchasing in response to the supply-demand environment and the establishment of multiple purchasing routes are expected to continue to contribute to profits. The Food Price Index for September released by the UN Food and Agriculture Organization (FAO) was 136, up 5.5% from the same month the previous year. CBT wheat futures have also been on a reversal uptrend since July. Substitution demand for relatively low-priced rice and rice flour is therefore expected.

Alpen Co., Ltd (3028)               1,989 yen (21/10 closing price)

・Established in Nagoya in 1972. Founding business was the development of own-brand products for ski equipment. In addition to the Winter Division, company manufactures and sells sporting goods in the Golf, Sports Lifestyle, Competitive/General Sports, and Outdoor Divisions.

・For results of FY2022/6 announced on 4/8, net sales decreased by 0.4% to 232.332 billion yen compared to the previous year, and operating income decreased by 52.6% to 7.153 billion yen. Existing-store sales of golf products were strong due to an increase in the number of people playing this sport where crowds do not gather, and sales of winter goods also increased thanks to snowfall. On the other hand, Sports Lifestyle, Competitive/General Sports, and Outdoor businesses dropped.

・For its FY2023/6 plan, net sales is expected to increase by 6.7% to 248.0 billion yen compared to the previous year, operating income to increase by 0.7% to 7.2 billion yen, and annual dividend to remain unchanged at 50 yen. Company’s priority strategy is to improve the convenience of both real stores and EC by responding to the EC market in the digital domain. With an increase in foreign tourists, and the government’s “nationwide travel support” program, ski resorts and winter sports are expected to be active with the arrival of the first season in three years without movement restrictions.

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