Japan's Economy: Monthly Outlook(Jul 2017)

◆The effective opening-to-application ratio for regular employees has reached a historic high of 0.99X, and is getting closer to the point where it will exceed 1X. Once it does, barring the occurrence of cyclical factors such as economic recession, possibilities are high that the ratio will continue to increase for structural reasons. In the not-too-distant future, serious wage inflation may begin to occur, affecting even regular employees.

◆However, there is still quite a bit of distance to cover before said wage inflation reaches the point of triggering a virtuous circle brought about by domestic demand. Sustainable wage inflation depends on whether or not corresponding labor productivity can also be attained in tandem. Since labor productivity such as this can take time to achieve, companies suffering from rising unit labor costs may very likely have to keep total labor costs under control by flattening the wage curve and placing restrictions on overtime.

◆With the shortage of manpower becoming more serious, moderate growth is expected in investment in rationalization & labor-saving for the purpose of improving productivity, as well as investment in research & development as a means of improving earnings. Mergers & acquisitions are expected to increase as well. However, it may be too much to expect these factors to become leaders in growth in capital expenditure overall.

◆Japan’s capital stock cycle is nearing the maturation phase. Meanwhile, the marginal productivity of capital expenditure in Japan is generally lower than the cost of capital, or the marginal productivity of labor in a price comparison. In addition, the fallacy of composition is now appearing, in which there is assumed to be little margin left for carrying out investment, especially in the labor-intensive industries which really need to invest in improving productivity. Consequently, if the unit cost of labor rises, there is the risk that corporations will be forced to make a choice between scaling down their business or suffering the hollowing out effect, or possibly even having to accept both. We advise caution regarding this situation.