In Japan, Shuntō (春闘), or ‘spring wage offensive’, is the term used for the annual wage negotiations between the country’s labour unions – organised by the Japanese Trade Union Confederation (RENGO) – and employers. Do not be fooled by the militarist language though, in recent years this offensive has better resembled a peace keeping mission.
The outcome of the most recent skirmish – a 0.7% increase in “base-up (salaries paid to employees excluding raises for promotion and seniority) is particularly measly given the country’s tight labour market and burgeoning inflationary pressures. Wage growth is key to Japan entering a truly self-sustaining inflationary period, but remains elusive, at least for now. Why is this so?
Maintaining employment has trumped maximising wage growth
To begin to make sense of this we must zoom out to see a fuller picture of the labour market. Japan has come to rely increasingly upon non-regular (temp) workers over regular employees; twenty years ago they accounted for twenty nine percent of the workforce, today that number is thirty seven percent.1
Whilst the working age population has been declining for decades, the actual workforce has expanded, principally as female participation has grown. This majority female pool of labour receives lower pay than regular employees, but enjoys more flexibility. This translates to higher churn which lubricates the market mechanism such that wages can adjust. Churn amongst the regular labour force may be rising but remains low by comparison – maintaining employment rather than maximising wage growth is the name of the game. The market’s gears have all but seized.
Wage bulls, such as CLSA’s Japan strategist Nicholas Smith, talk of a looming “singularity” for the labour market – the point at which all of Japan’s unutilised labour has been put to work – which could finally force wages north.2 Maybe. But the timidity of the unions, the conservatism of employers and low churn amongst regular employees are non-trivial issues which will need to be overcome for Japanese wages to really shift.
Stagnant wages are not just a frustration for workers, but for the government too. In his recent speech at the Guildhall in the City of London (which we attended), Prime Minister Kishida said…
“A major challenge for Japan is that, while productivity growth per working hour has been comparable to that of other countries, wage growth has been low. That has held back consumption and, by extension, overall economic growth […] the government will introduce tax incentives that encourage employers to increase wages, and work with the private sector to create a social atmosphere in which it is normal and natural for pay to rise.”3
In reality, it will be a surprise to most – ourselves included – if the proposed fiscal incentives have much impact. The “creation of a social atmosphere” may be more important but will take time.4
Consumers feel the squeeze
For the time being Japanese consumers are being squeezed. In April, household spending declined 1.7% versus the same period last year, and real wages shrank 1.2%.5 Given this backdrop, we believe it makes sense for us to be underweight consumption focused stocks and overweight tight labour market beneficiaries. Our strategy has zero weightings in leisure, food and restaurants and only one retailer – a discounter, Pan Pacific International. Meanwhile, we continue to hold staffing companies (TechnoPro and Recruit) as well as business process outsourcing companies Prestige International and Direct Marketing Mix.
To add insult to injury, Japanese workers’ meagre salary growth comes as companies’ profits are rebounding strongly post the extended pandemic lull, up 32% for the year.6 Aggrieved perhaps, but not surprised, as profits and wages decoupled decades ago.7
Fortunately for investors, companies’ parsimony towards workers does not extend to shareholders. Announced share repurchases for the current fiscal year have almost doubled to levels not seen since 2006, whilst dividends are also on the rise.8 9
Beware flash-in-the-pan dividend growth
Corporate Japan’s ability to better reward its shareholders is well known, but in the interest of completeness it is a function of bomb-proof balance sheets and historically low pay-outs. 10 11 This is, of course, extremely good news and bodes well for continued growth in shareholder returns, but investors must beware of piling into the most recent dividend winners (e.g. the Marine, Metals & Mining, Trading Companies & Distributors, and Energy sectors).12
Those top four sectors by dividend growth are all to some extent commodity-related and enjoying windfall profits. Whilst it makes sense that their dividends are spiking now, it seems excessively hopeful to believe they will continue to kick-on especially if anti-inflationary policies lead major economies into recession. Note that in the global financial crisis shippers cut dividends by 73%, steel makers slashed by 70% and trading companies halved them.13 We are no chartists but when looking at the history of dividends for both telecoms and shippers – the former ticking up consistently over the long term, the latter flat-to-declining for years before a recent massive spike upwards – we know which one we would more confidentially extrapolate into the future.14 And so it is that our strategy continues with its overweight positions in telecoms and staunchly maintains its zero exposure to shippers, traders and the like.
In the fullness of time, it is of course possible – and indeed desirable – for both workers and investors to prosper in Japan. Perhaps labour’s time will come but only for the most optimistic can this be an expectation rather than a hope. Shareholders on the other hand have every reason to expect to continue to be looked after. We suspect that for some time to come it will feel much better to be an investor than a worker in Japan.
2 ‘The coming wage war’, CLSA
3 Transcript: Japan PM Kishida’s speech in London – Nikkei AsiaChina risks falling behind U.S. growth rate as lockdowns take toll – Nikkei Asia
4 Japan to deny tax credits to companies that fail to raise pay – Nikkei Asia
5 Japan’s household spending falls as rising costs squeeze consumers – Nikkei Asia
6 Source: Mizuho – Nagayoshi, 4QEarningsAggregates (Final)
7 The yen and the BoJ: where next?’, CLSA
8 Japan stock buybacks double to $32bn, highest in 16 years – Nikkei Asia
9 ‘Cash mountain market & dividend kings’, CLSA
10 ‘AGM season: barbarian at every gate’, CLSA
11 Goldman Sachs, Update on Stocks with Compelling end-3/22 dividends
12 Cash mountain market & dividend kings (clsa.com)
14 ‘Cash mountain market & dividend kings’, CLSA
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