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Japan's Wages Are Rising the Fastest in Decades: What it Means For Stocks

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  • Morgan Stanley expects Topix index to rise to 1,770 this year
  • Real estate, insurers among main beneficiaries of wage growth

It’s not making headlines yet, but wages in Japan are rising the fastest in decades, in a shift that’s 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 percent by the end of next year, with higher hourly earnings canceling 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, Jonathan Garner, chief Asia and emerging-market equity strategist at Morgan Stanley Asia Ltd. in Hong Kong, said in a May 5 phone interview.

Compensation levels are already climbing, with a broad gauge showing a 2.2 percent jump in 2016 that followed two years of near-2 percent 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 percent drop in March.

Garner and his colleagues in April published a study on how wage increases will shake out across corporate Japan, concluding that there will be more winners than losers. He reiterated the findings of the report in an interview Friday, when he maintained a 1,770 target for the Topix index for late 2017. The gauge closed at 1,587 Thursday.

Main winners from wage reflation

  • Real estate, as rents increase and higher inflation expectations lift property prices
  • Non-life insurance will benefit as retail consumption and housing investments pick up
  • Commercial and professional services, particularly companies that offer staffing and employment assistance
  • Media, as corporate advertising rises in anticipation of higher consumer spending
  • Software and services, with consumer spending boosting earnings of business-to-consumer e-commerce players

Consumer-focused sectors with low salary bills as a percentage of revenue are best positioned. Logistics and some health-care companies will be most negatively impacted, the report said.

“On the whole it’s going to turn out to be a relatively good story,” Garner said in the recent interview.

The yen, in a global inflationary environment, will slip to 125 per dollar by June 2018 from about 114 now, Morgan Stanley said.

A tight labor market, with unemployment at 2.8 percent in March, suggests bigger paychecks are coming, particularly as a worker shortage becomes more acute. Household names from Panasonic Corp. to Toyota Motor Corp. announced wage increases in March.

See also: Japan’s big firms seen playing it safe on profit forecasts

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.”

Most positively impacted stocks

Most negatively affected by wage reflation

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