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13 Mar 2014
Flash: Japan's wage negotiations positive for USDJPY - Nomura
FXStreet (Bali) - As Yujiro Goto, FX Strategist at Nomura, notes how many Japanese companies are increasing base salaries this year.
Key Quotes
"Major companies have now decided their compensation levels for the next financial year after the negotiation with labour unions. As expected, given the government pressure on them, many more companies are increasing base salaries than in previous years. Most automakers, electronics companies, and some service sector companies have decided to increase base salaries. While most companies' increases in base salary did not meet the amount requested by labour unions, they increased base salaries for the first time since the financial crisis. Furthermore, many companies have agreed to pay the amount requested by labour unions as bonus payments."
"As the labour market tightens, Japanese companies are becoming more positive about increasing wages. January‟s unemployment rate was 3.7%, the lowest level since July 2007, suggesting the wage environment is the best since the financial crisis, even without government pressure to hike base salaries. The jobs-to-applicants ratio remains above 1.0, and for some industries the ratio is significantly higher (for example, 3.74 for construction-related jobs and 2.46-3.45 for the restaurant sector). As the economy gains momentum, companies will likely find it harder to find suitable employees. Thus, the decision to increase compensation, including base salaries, is not surprising. Higher wages should help the economy exit deflation, which would be positive for Japanese equities and USDJPY in the medium term. In addition, a better employment and wage environment should support consumer confidence beyond the sales tax hike in April, encouraging retail investors to shift into risky assets from safe assets."
"However, the size of the base salary rise is not necessarily large enough to accelerate inflation to 2%, although the impact on inflation expectations is worth monitoring. Follow-up decisions by smaller companies are also important, but after the sales tax hike real wages are still likely to decline, putting downside pressures on consumer confidence especially in Q2. We judge the results of the wage negotiations, with more companies increasing base salaries, to be positive for USDJPY in the medium term, but they are unlikely to be a near-term catalyst of JPY weakness."
Key Quotes
"Major companies have now decided their compensation levels for the next financial year after the negotiation with labour unions. As expected, given the government pressure on them, many more companies are increasing base salaries than in previous years. Most automakers, electronics companies, and some service sector companies have decided to increase base salaries. While most companies' increases in base salary did not meet the amount requested by labour unions, they increased base salaries for the first time since the financial crisis. Furthermore, many companies have agreed to pay the amount requested by labour unions as bonus payments."
"As the labour market tightens, Japanese companies are becoming more positive about increasing wages. January‟s unemployment rate was 3.7%, the lowest level since July 2007, suggesting the wage environment is the best since the financial crisis, even without government pressure to hike base salaries. The jobs-to-applicants ratio remains above 1.0, and for some industries the ratio is significantly higher (for example, 3.74 for construction-related jobs and 2.46-3.45 for the restaurant sector). As the economy gains momentum, companies will likely find it harder to find suitable employees. Thus, the decision to increase compensation, including base salaries, is not surprising. Higher wages should help the economy exit deflation, which would be positive for Japanese equities and USDJPY in the medium term. In addition, a better employment and wage environment should support consumer confidence beyond the sales tax hike in April, encouraging retail investors to shift into risky assets from safe assets."
"However, the size of the base salary rise is not necessarily large enough to accelerate inflation to 2%, although the impact on inflation expectations is worth monitoring. Follow-up decisions by smaller companies are also important, but after the sales tax hike real wages are still likely to decline, putting downside pressures on consumer confidence especially in Q2. We judge the results of the wage negotiations, with more companies increasing base salaries, to be positive for USDJPY in the medium term, but they are unlikely to be a near-term catalyst of JPY weakness."