The average tenure of a post-Second World War Japanese Prime Minister has been just over two years. The incumbent Prime Minister Shinzo Abe has been in office for four. That in itself makes his premiership remarkable.
But Mr Abe is a unique Japanese Prime Minister in other ways. Compared to his predecessors, he takes a much bolder political stance. He is not afraid to push his ideas on security and international relations, pursuing unpopular policies such as restarting Japan’s nuclear power plants, ratifying the Trans-Pacific Partnership, lifting some of the restrictions on the Japanese Self Defence Forces (SDF) and passing the Casino Bill.
It is also true, however, that – like his predecessors – he remains saddled with familiar challenges at home such as Japan’s shrinking and ageing population and an idle economy. In such a climate, any attempt to push through fundamental changes would potentially provoke the ire of the general public which remains discontent with the state of the economy.
Economy lacks strength but optimism is on the rise
In 2016, the Japanese economy grew only 2.2% from the previous year, inflation remains far below the government’s 2% target, and wages have risen only slightly.
Despite four years of economic stimulus and Mr Abe’s promise of massive structural reforms, two decades of economic stagnation continues – Japan’s return to growth remains hindered by the twin challenges of an ageing population and the burden of the world’s largest public debt (currently 246% of GDP) which built up during years of deflation.
While the Japanese Government is encouraging companies to increase domestic investment and raise wages to boost demand – that will in turn stimulate the economy and defeat deflation – the pace of improvement remains subdued with 3Q 2016 GDP growth of just 0.3%.
Unemployment in Japan currently stands at a 20-year low of 3% but the sharp division between regular workers with life-time employment and part-timers with no security has muted the effect on wages. Labour mobility for regular workers is very low, while part-timers often prioritise security rather than higher wages.
For 30 years until 2010, Japan had recorded wage surplus every year. However, in 2014, Japan’s trade deficit was the worst on record as the weaker yen pushed up the cost of imports.
Offsetting the weakness in the trade account fuelled by imports, the income from Japan’s large portfolio of foreign assets has kept the current account in the black. Yet the irony is that consumers are still unwilling to dip into their savings – one of the lingering after-effects of the 2014 rise in consumption tax and wariness about the pending further rise in 2017.
Non-Life: Premium and profits expand overseas
In 2015, the portfolios of major non-life insurance groups were hit by extensive damages incurred by natural disasters such as typhoons and earthquakes.
In 2016, the net premium written and ordinary profit increased significantly due to the acquisition of overseas insurers, decrease of natural disaster claims and increase of automobile premium hike.
The domestic P&C market portfolio is not expected to grow based on declining and ageing population demographics and low economic growth. But premium and profit have continued to expand in the overseas market, enjoying the fruits of their excess capital. Thus, the result is an overall historically stable earnings in underwriting and adequate capitalisation.
Life: A reversal of fortune in 2016
In 2015, major Japanese life insurers booked their highest profits for six months, boosted by better investment returns.
In 2016, a total reversal of financial outcome was booked for the first six month results that ended 30 September 2016. Premium and other income decreased from the same period of the previous year and core business profit dropped primarily due to lower income gains on investment, mainly caused by negative interest rate that was introduced by Bank of Japan (BOJ).
This has also affected the Japanese life insurance industry, reversing it from stable to negative. This drop could trigger significant adjustments in business and product strategies. These in turn could result in reconsideration of insurance sales channel fundamentals that could then strain their underwriting and sales capacity.
Furthermore, they are likely to pursue more mergers and acquisition opportunities abroad, and accumulate foreign bonds holding to improve their investment yield in 2017. They will thus follow in the footsteps of Dai-ichi Life Insurance and major non-life insurers – such as Tokio Marine & Nichido Fire Insurance, Mitsui Sumitomo Insurance, and Sompo Japan Nippon Koa Insurance – which are already actively seeking growth outside Japan.
Confidence rebounds at year-end
Toward the end of 2016, confidence among some of the nation’s biggest firms has rebounded for the first time in more than a year, as a sliding yen boosted profit hopes.
The quarterly report from the Bank of Japan’s think tank found that companies are generally optimistic about the economy in 2017, indicating a reading of 10 among major manufacturers, up from 6 points in its previous report.
The most recent report also revealed higher confidence amongst small-to-medium sized firms. The US dollar has soared and the yen is trading at monthly lows since the surprise US Presidential Election results in November. There are hopes for a big government spending package and higher interest rates under the Trump Administration.
Despite rebounding confidence, however, the hot topics on the minds of the insurance industry in the coming year are indicative of the political and economic pressures which continue to dampen many of the results in the Japanese market.
Negative interest rates, trillion yen losses in the Kumamoto earthquake, the pending 10% consumer tax, squabbles over plans for the Tokyo Olympics, tension in the Korean peninsula, Brexit and what’s to come from a Trump Presidency – uncertainty is a powerful global dynamic which has great potential to influence the bottom line at home.
Mr Tetsuya (Ted) Fujita is Head of Market at ReMark Japan.
ReMark’s 2016 Global Consumer Study You can’t always get what you want is critical reading for deeper analysis on how to generate a perception of need for life insurance by offering propositions of real value to the customer – more important than ever as the industry is challenged by a crisis of value. Download your copy at remarkgroup.com/insight