May 15, 2014 1:15 am JST

Japan's rising labor costs a sign of corporate confidence

SHUICHI MARUYAMA, Nikkei staff writer

TOKYO -- Japanese shares have not been able to ride the coattails of the global market rally as investors remain skeptical about Japan Inc.'s profit prospects in light of a consumption tax hike and increasing labor costs.

     The Nikkei Stock Average fell slightly on Wednesday after a jump on Tuesday, even as the U.S. Dow Jones Industrial Average closed at an all-time high for the third consecutive session the day before.

     Worries that higher labor costs will eat into corporate profits appear to be a factor preventing active Japan buying. With the ratio of job offers to seekers having improved for 16 months in a row, labor shortages are clearly pushing up wages.

     Large Japanese companies raised pay by an average 2.39% in 2014, the highest level in 16 years, according to the Japan Business Federation. Monthly statistics from the Labor Ministry show that total pay including overtime has been on an uptrend as well.

     But these are not necessarily bad signs. While rising wages do erode corporate profit, historical data shows that higher labor costs often come with profit improvement at companies.

     "When wages increase, corporate earnings often grow because the accompanying economic recovery improves sales as well," says Masashi Akutsu of SMBC Nikko Securities. "Companies raising wages are fully confident about boosting sales."

     Asahi Kasei, for instance, said Friday that it expects labor costs to increase by well over a billion yen this fiscal year because of its base pay upgrade. But Hideki Kobori, primary executive officer, announced with confidence that the company nonetheless projects a record pretax profit, thanks to gains generated by overseas investment. The material maker's stock price has risen 6% since before the earnings announcement.

     Between April 1 and April 14, seven out of 10 companies with the largest pay increases saw their stock prices either rise or fall more mildly than the Nikkei average.

     Even general construction companies, which have struggled amid severe labor shortages, are seeing positive signs, as they secure orders priced high enough to absorb the rising labor costs. Three of the four biggest industry players project an increase in operating profit this fiscal year. As investors took a second look at the positive trends, Shimizu's stock climbed to a year-to-date high on Wednesday.

     The April economy watchers survey of shop workers, cab drivers and others holding jobs sensitive to economic conditions, shows a significant improvement in the outlook for two to three months down the road, apparently driven by hopes that wage increases will lead to robust spending.

     Kohei Okazaki, economist at Nomura Securities, projects that the sales tax hike that took effect April 1 will not slow the economy. "The economy will bottom out in the July-September quarter and will pick up thereafter, thanks to higher wages, among other factors," he says.