TOKYO • It is not making headlines yet, but wages in Japan are rising the fastest in decades, in a shift that is poised to divide the nation's companies - and their stocks - into winners and losers, according to Morgan Stanley.
The firm expects wage growth to accelerate to 2.8 per cent by the end of next year, with higher hourly earnings cancelling out fewer working hours and slower employment growth.
While wage reflation means companies have to pay more in salaries, it also leads to stronger demand and revenue gains.
Inflation, spurred by wages, will be "the last piece of the jigsaw puzzle to fall into place" for Japan's economy, said Mr Jonathan Garner, Morgan Stanley Asia's chief Asia and emerging market equity strategist.
Compensation levels are already climbing, with a broad gauge showing a 2.2 per cent jump last year that followed two years of near 2 per cent gains - the strongest trend since the 1990s. Hourly pay rates have yet to show that strength, as seen in a release on Tuesday showing a 0.4 per cent drop in March.
Mr Garner and his colleagues published in April a study on how wage increases will shake out across corporate Japan, concluding that there will be more winners than losers.
The report stated that the main winners from wage reflation were the real estate sector, as rents increase and higher inflation expectations lift property prices, and commercial and professional services, particularly companies that offer staffing and employment assistance.
Media will also benefit as corporate advertising rises in anticipation of higher consumer spending. So too software and services, with consumer spending boosting earnings of business-to-consumer e-commerce players. Logistics and some healthcare companies will be most negatively impacted, the report said.
"On the whole, it's going to turn out to be a relatively good story," Mr Garner said.
The yen, in a global inflationary environment, will slip to 125 per US dollar by June 2018 from about 114 now, Morgan Stanley said. The yen was trading at 80.7 against the Singapore dollar yesterday.
A tight labour market, with unemployment at 2.8 per cent in March, suggests bigger pay cheques are coming, particularly as a worker shortage becomes more acute. Household names from Panasonic to Toyota Motor announced wage increases in March.
Over the past four decades, when wage inflation and economic growth accelerated at a similar pace, it led to gains in the Topix in each of the next two years, the report said.
"More sectors have positive than have negative correlation between operating profits and rising wages historically," it said. "Only the general-purpose machinery sector has meaningful negative correlation."