As previously blogged, March is an anxious time in Japanese companies. Not only are most corporate restructurings and promotions announced at the beginning of April, but pay rises for the new financial year will kick in.
Prime Minister Abe has been pressurising Japanese companies to increase wages for some years now, and yet Japanese companies are still sitting on piles of cash. Japanese wages have not increased more than 5% a year since the early 1990s, mostly averaging around 2-3% wage rises a year. The Japanese economy has been in a period of deflation since the late 1990s until the past year or so, so these are real wage increases. Nonetheless, there is a vicious circle between deflation and low pay increases, which Abe wants to break as part of his 3 Arrows for reforming the Japanese economy.
Low Japanese salary levels
Although I knew Japanese salary levels were not that high relative to other developed economies, I was surprised to see in the Nikkei Business magazine that average British salaries for the head of R&D at a pharmaceuticals company (£400K) or a CFO of a multinational (£390K) are so much higher than Japan (less than £200K) and even the USA (£200K to £250K). I wonder if these figures are net of any bonuses. Traditionally, Japanese companies paid 1/18 of salaries monthly, retaining the remaining 6/18 for twice yearly bonuses. Increasingly these bonuses are performance related, particularly at management levels.
Earnings distributed to shareholders or retained
Nikkei Business then goes on to analyse how earnings are distributed in Japanese companies, between labour, retained earnings and shareholders. The proportion paid to shareholders has been steadily increasing for Japanese companies, recently outstripping the proportion paid to labour (which has been in decline since 2008), but still below the retained proportion, which has been fairly steady these past 10 years. In the US retained earnings is the lowest proportion, declining since 2009, whereas shareholders have the highest share, increasing since 2008, with labour’s share declining since 2000, with a slight bump upwards around 2007/8.
Root causes of labour’s declining share
Root causes for this might be that labour’s negotiating power has fallen – unionization in Japan has fallen from nearly 60% of the workforce in the immediate postwar period to under 20% by 2017. Also thanks to Abe’s labour reforms, companies are not paying out so much for overtime – theoretically at least there is less overtime being done – but this is not being replaced by increases in base salaries.
Who could pay their employees more?
The juiciest bit of Nikkei Business’s feature is in the listing up and analysis of companies who have the biggest potential for increasing salaries:
1 . Tokyo Electron (scores highest on Return on Equity 10, net cash 9 and revenue growth 9 with a 3/10 on returns to labour
2. Nintendo (Dividend payouts 9, capital to asset ratio 9, net cash 10, returns to labour 2)
3. Kakaku.com (ROE 10, capital to asset ratio 9, revenue growth 9, returns to labour 4)
4. Subaru (net cash 10, revenue growth 8, dividend payouts 8, returns to labour 2)
=5. Start Today (revenue growth 10, ROE 10, dividend payouts 7, returns to labour 3)
=5. Chugai Pharma (capital to asset ratio 9, net cash 9, dividend payouts 8, returns to labour 3)
=5. Yahoo, Recruit, with MonotaRO and Fanuc at =9.
Other companies in the top 30 who are also active in Europe include Murata, Kao, Keyence, Shimano, Astellas and Hoya.
It’s an intriguing mix of new internet companies, growing fast, but perhaps preferring to pass on success to shareholders rather than employees and traditional, older companies who are preferring to retain earnings for a rainy day.
The special feature concludes with an interview with Hideto Fujino of Rheos Capital Works, in which he says investors want to hold shares in Japanese companies who raise salaries, if this is to attract more motivated, talented employees. “We don’t see payroll as a cost, but an investment”.
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