Labor market conditions in Japan are tightening. In February, unemployment fell to 3.6% while the job offer-to-applicants ratio rose to 1.05—levels not seen since mid-2007 for either metric. I was in Japan recently to meet with the senior management of about two dozen companies to gauge how changing labor market conditions could affect business sentiment and consumption.
Manufacturers still appear quite relaxed over the availability of labor while service sector companies appear quite concerned. This was the expected response as manufacturers have the option to move overseas where labor costs are a fraction of what they are in Japan. On the other hand, you can’t really move a restaurant to China. Service companies are impacted not only as a result of wage costs, but also construction costs. Japan’s labor shortage is particularly acute in the construction sector where job openings outnumber job seekers three to one. Faced with higher store opening costs, some companies have had to curtail expansion plans.
Domestic Japanese companies have typically controlled wages in the past by increasing temporary labor. Temporary workers as a proportion of the overall labor force has increased from 26% in 2000 to almost 38% at the end of 2013. This has been a primary reason why wages in Japan have been stuck in neutral since 1997. This long-term trend may be turning a corner, however.
Recently, two major Japanese consumer discretionary companies have announced plans to incrementally transition their temporary staff to full-time workers. They cited benefits from reduced staff turnover and training costs as main drivers for the change. But this shift also likely reflects the difficulty, even among prominent companies, to hire and retain the necessary workforce for their operations. These firms, considered leaders in their respective industries, may set the tone for others to follow. After all, if you were a worker looking for a job, where would you rather go? A top company offering permanent positions? Or another firm offering a temporary job?
There has been much concern that Japan’s consumption tax hike, which began this month, may derail the country’s still-fragile growth prospects. Though a short-term decline in demand seems highly likely, I believe the strong job market may offset some of the negativity surrounding this change.
Service sector companies are responsible for 65% of Japan’s overall workforce—in jobs that cannot be shipped overseas. If current labor market conditions continue, there may be considerable pressure to raise wages going forward. The annual spring wage negotiations between employers and unions have resulted in a modest win for workers who will see a base wage increase of roughly 2.2%. Still, this year, there was considerable pressure from the government to raise wages. The government even pushed up a scheduled corporate tax cut to fund the wage increases by a year. Tight labor conditions are not fully reflected in wages yet, leaving the possibility for future wage increases. I believe this could be the catalytic development that the Bank of Japan has been working toward in its inflation targeting policy. Wage growth is crucial to convincing both consumers and investors that inflation in Japan is here to stay.
Opinion Column by Kenichi Amaki, Portfolio Manager at Matthews Asia
The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.
For Funds Society, Madrid