Japanese stocks will extend a world-beating rally as surging corporate earnings result in higher wages, supporting shares that benefit from domestic spending, according to Goldman Sachs Group Inc.
The Topix index will climb to 1,250 in three months, an 8.7 percent gain from yesterday's close, said Kathy Matsui, chief Japan strategist at the New York-based bank. She expects the gauge to reach 1,300 in six months and 1,400 in a year -- a level unseen since June 2008 -- as Prime Minister Shinzo Abe's policies spur inflation, putting pressure on companies to boost dividends and salaries.
"The next big catalyst for reflation is when profit growth translates into higher incomes," Matsui said in an interview in Tokyo on Oct. 7. "We have to wait a little while as wages won't rise overnight. But at the end of the day, one of the key transmission mechanisms of reflation to households is via higher incomes."
Abe's efforts to reignite growth through monetary easing and fiscal stimulus have mostly benefited investors and large manufacturers as the yen weakened, boosting overseas profits and driving the biggest stock-market rally in four decades. Getting businesses to start distributing their swelling earnings and near-record cash through higher wages will be key to sustaining a rebound in the world's third-largest economy.
Regular salaries excluding overtime and bonuses fell 0.4 percent in August from a year earlier, a 15th straight drop, government data showed on Oct. 1.Stock Gains
The Topix surged 34 percent this year through yesterday, handing investors the biggest gain among 24 developed markets tracked by Bloomberg. The gauge added 5.3 percent in the three months through September, bringing its four-quarter gain to 62 percent, the steepest rally since the period ended March 1973.
Earnings per share at Topix member firms will increase 35 percent in the next year, estimates compiled by Bloomberg show.
Companies in domestic-oriented industries such as real estate, infrastructure and housing are likely to boost full-year profit forecasts after reporting first-half results, giving them more scope to increase wages, Matsui said, declining to name specific businesses. The mid-year earnings season for many companies on the Topix is scheduled to start later this month.
"I think it will be a pretty decent set of results, but more important than the results themselves is how they will impact companies' guidance for the full year," Matsui said. "We have been more overweight domestic reflation sectors than exporters."Inflation Target
The Bank of Japan is seeking to spur inflation by targeting an annual 60 trillion to 70 trillion yen expansion in the monetary base.
Japanese businesses kept some 220 trillion yen ($2.3 trillion) in cash on their balance sheets as of the end of June, according to data compiled by the central bank. Price gains in the nation accelerated to the fastest pace since 2008 in August on higher energy costs, data showed Sept. 27.
"While BOJ policies are important, from here on, in my view it's less about what the BOJ does next," Goldman's Matsui said. "It's more about what private companies will do to share the fruits of reflation with the rest of society through wages and investment."