Julius Baer's Lifestyle Index of high net worth individuals (HNWIs) in Asia is showing a consistently appreciating trend with positive price and demand developments for luxury goods and services, according to the group's fourth Wealth Report: Japan.
The lifestyle index for Tokyo has increased by 0.8 percent in Japanese yen terms. On a US dollar basis, prices have declined by three percent but this can be explained by the fact that the Japanese yen being among the strongest currencies in Asia during 2017, the report says. In terms of price trends for individual items, Tokyo is driven by similar factors and preferences as most other capital cities. As in much of Asia, luxury consumption in Tokyo is increasing and competition is keeping prices down from the supply side.
The publication highlighted that Tokyo has fallen from fourth to seventh in the overall ranking of the most expensive Asian cities, and from fourth to fifth when the big-ticket items of real estate and cars are weighed separately. This development matches the overall observations that while inflation is not "rampant" despite extreme monetary policies, gradually improving private consumption and investment trends are breaking Japan’s deflationary trends from the ‘real’ economy side.
Japan’s economy overall is on track to exceed growth expectations for the full year in 2017. The publication noted that Japan’s ‘real’ economy is in very good health easily becomes overlooked in an environment of very high expectations for potentials but also strong concerns about risks. In an international environment of intensifying political risks and concerns over valuations across most asset classes, growth and wealth accumulation in Japan are healthy.
The report argues that financial risks in some markets might be growing, but that ‘real’ markets and assets in Japan are performing strongly. Companies are gaining from low capital costs and high levels of technological development. Profits and incomes have been growing convincingly. Against political uncertainty, however, Japanese households have largely focused on investing in cash and government bonds.
These investments into the ‘political’ markets of government bonds and bank deposits now face increasing risks from continuously low interest rates and growing costs from gradually increasing inflation. Diversification into markets that deliver ‘real’ returns on private initiative will become increasingly important again in the long run.
Julius Baer identified long-term value in Japan's stock market. Compared to the negative real returns on bonds and cash, stocks remain a interesting investment according to the report as long as their risk premiums remain positive. In Japan’s stock market, the successful exporters have always been the preferred targets of investors because of their high productivity, their growing overseas markets and a relatively higher ratio of foreign ownership, which pushes them towards increased payouts for investors. However, the report noted that the flip-side of their high valuation is the low earning yield for investors.
Timing and risk premiums are the main obstacles for investors when diversifying their portfolios into riskier asset classes such as stocks and international securities.
Julius Baer is a Swiss private banking group with total assets under management amounted to CHF 355 billion as of June 2017. The group employs a staff of close to 6,000, including approximately 1,300 relationship managers, and is present in over 25 countries and more than 50 locations.