Nomura Leads Finance Wage Gains as Linkers Bought: Japan Credit

Jan 13, 2014 11:06 pm ET

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Jan. 14 (Bloomberg) -- Japan’s finance industry is bracing for higher consumer prices by raising wages of its youngest recruits and recommending purchases of inflation-protected debt.

Nomura Holdings Inc., Daiwa Securities Group Inc. and Orix Corp. have said they will boost salaries between 2 and 3 percent for workers about to get hit by a three percentage point increase in the sales tax. The nation’s break-even rate, a measure of bond-market inflation expectations, indicates annual price gains of 1.69 percent in the next five years, the highest reading in seven months. The equivalent U.S. gauge signaled a 1.89 percent yearly increase in the cost of living.

Royal Bank of Scotland Group Plc and SMBC Nikko Securities Inc. say more companies will answer Prime Minister Shinzo Abe’s call to raise wages as the labor market tightens, boosting demand for so-called linkers. The percentage of companies in the world’s third-largest economy saying they are short of workers rather than overstaffed rose to the highest in six years in December, according to Bank of Japan data.

“Inflation is taking root in Japan so, without a doubt, there will be more demand for linkers,” said Koya Miyamae, a Tokyo-based economist at SMBC Nikko Securities, a unit of Japan’s second-largest bank. “Wages look bound to rise, maybe not as much as 2 or 3 percent but a bit less than 1 percent.”

Japan’s 0.1 percent 10-year inflation-linked notes fetched a record 105.5 yen yesterday, after an auction of the securities drew a higher-than-expected price on Jan. 9. Japan resumed selling linkers in October for the first time in five years.

Orix’s Raise

Orix, a Tokyo-based leasing company, said it plans to increase base salaries for junior employees in Japan by an average 3 percent.

“When you consider Orix’s business model our workers are the most important thing, and so we’ll maintain salary levels in line with the market at minimum,” Makoto Inoue, the president of Orix, said in an e-mailed statement on Jan. 9. “Our thinking is that the proper order is for the economy to recover, corporate earnings to increase, and then for wages to rise.”

Nomura, Japan’s largest brokerage, said in November it will raise pay for about 4,000 domestic staff by an average 2 percent starting in April. The company will target younger workers, who are more likely to spend and support the economy, it said in a statement. Daiwa, the nation’s No. 2 brokerage, said this month it plans to boost salaries for about 5,000 junior staff.

Accelerating Inflation

Japan’s core consumer price index increased 1.2 percent in November from a year earlier, the most since October 2008, according to government data released last month. The Bank of Japan, led by Abe’s hand-picked governor Haruhiko Kuroda, has been buying more than 7 trillion yen ($68 billion) of government bonds a month since April to try to end 15 years of deflation.

Wages excluding bonuses and overtime were unchanged from a year earlier in November, ending a 17-month slide, while overall cash earnings rose 0.5 percent, breaking four months of declines, government data showed last month.

Corporate demand for workers is starting to outstrip the supply of laborers, Akito Fukunaga, the chief rates strategist at RBS in Tokyo, wrote in a Jan. 7 report. Buying Japanese inflation-linked bonds is the bank’s top trade recommendation for 2014, Fukunaga wrote.

There was one job available in Japan for each applicant in November, the most since October 2007, the labor ministry said last month. Job ads in the nation increased 10.4 percent in the third quarter, according to a report from Robert Walters Plc, the London-based recruitment company.

Staff Shortage

The percentage of companies saying their workforce is excessive minus those saying it’s insufficient fell to minus 10 in December, the least since the same month in 2007 and meaning that most firms feel that staffing is stretched, according to the BOJ’s Tankan survey released last month.

Not all analysts predict wage increases this year that will push up prices. It usually takes about three years for companies to raise base salaries after earnings improve, according to Shuichi Obata, a Tokyo-based senior economist at Nomura Securities Co.

“Base salaries won’t increase this year and companies will continue to hire non-regular workers to meet higher labor demand,” said Obata. “Some large companies with decent earnings might raise base salaries this year but most small- and medium-sized companies, which have been cutting fixed costs to survive, can’t afford to do that.”

Non-Regular Employees

The ratio of non-regular employees, which include part- time, temporary and contract workers, reached a record 36.7 percent in the July-September quarter in labor ministry data going back to 1984, rising from 30.2 percent a decade earlier. Japan’s sales tax will climb to 8 percent in April.

Abe’s program of monetary easing, fiscal spending and growth strategies spurred a 52 percent advance in the Topix index of shares last year, and an 18 percent weakening in the yen against the dollar. Currency depreciation tends to contribute to inflation by boosting import prices. The yen traded at 103.33 per greenback as of 9:53 a.m. in Tokyo.

Japan’s benchmark 10-year bond yield was at 0.665 percent today. The 10-year inflation-adjusted rate, or the real yield, was at 0.2 percent last week, near the lowest since 2008. Kuroda has said reducing real interest rates will help stimulate corporate and household spending, while Morgan Stanley warned that inflation and overspending may push the nation’s finances to the brink.

“It’s still uncertain whether CPI will reach 2 percent but that’s not a big issue: if CPI stays above zero for a long time and real interest rates fall to minus, that’s enough,” said Akiyoshi Takumori, the chief economist in Tokyo at Sumitomo Mitsui Asset Management Co., which oversees $117.2 billion in assets. “People’s deflationary mind-set is being swept away, and Abenomics is succeeding in that sense.”

--With assistance from Masaki Kondo in Singapore and Andy Sharp and Takako Taniguchi in Tokyo. Editors: Ken McCallum, Pavel Alpeyev