Macq-ro insights:Myth-busting,Japanese wages

The failure of Japanese total cash earnings to accelerate, below, has causedconcern amongst investors met recently whilst global macro marketing. Ratherthan taken positively as a sign of corporate cost control, it has led to increasedinvestor uncertainty over the sustainability of Japanese economic growth.

The good news is that sluggish wage growth is attributable to the hiring over1982-92 of regular employees which proved excessive, in our opinion. This wasa period of labour scarcity, chart below, when Japan’s real GDP growth wasexpected to continue at 4% pa. Hired aged 22, these employees are 57-47years-old now. Regular employees have very high job security in Japan.

A company with excess workers does not increase wages: we believe theeffective reservoir of underemployed regular workers is equivalent to over 10%of Japan’s workforce, and is currently absorbed in non-core subsidiaries. As theyretire over the next decade, and as low-return businesses are sold or closed, weexpect capital efficiency and labour productivity to improve leading to both higherROEs and employee real wages. This is a medium to long-term Bullish factor forJapanese equities.