Japan Labor Squeeze Gets Serious Enough to Spur Investment Calls

(Bloomberg) -- Japan's wages may still be falling by some measures, but some analysts are so convinced that the country's labor shortages are going to impose a cost shake-out for companies and markets that they've started making investment recommendations.

"The labor shortage is becoming more acute," with unemployment at just 2.8 percent, Bank of America Merrill Lynch analysts including strategist Shusuke Yamada and economist Izumi Devalier wrote in a May 19 report. "We believe the wage pressures will rise gradually and feed into broader inflation in the long term." As a result, the bank prefers "labor-shortage beneficiaries over labor-shortage strugglers."

Some companies are already moving to save on labor, including convenience-store chain Seven & i Holdings Co., which BOFAML rates as a "buy." The analysts cite its deployment of integrated chips that use radio-frequency identification technology in sorting baskets to save the labor of store inspections to see how goods are moving.

Rival FamilyMart UNY Holdings Co. is among those lagging behind and set to feel greater impact from rising labor costs, according to the team, which highlighted differences in impact of personnel costs on operating profits in the following chart:

"The immediate cost pressure (first implication) and resulting incentive for productivity enhancement (second implication) are already impacting company fundamentals and share prices despite muted macro-level inflation," the BOFAML analysts wrote.

Morgan Stanley analysts have also done a deep dive into how rising wages will affect Japan Inc. -- read here about their take.

Many economists are still skeptical about compensation levels -- after all, average monthly earnings fell 0.4 percent in March from a year before. But the broadest measure of pay across the economy indicates the strongest trends since the 1990s. And anecdotes of the effects of worker shortages abound -- such as delivery company Yamato Holdings Co. raising prices for the first time in more than a quarter century.

Some of the labor-shortage beneficiaries, in BOFAML's view, include:

• Recruit Holdings Co., given tight job markets "should benefit the staffing business." Price target for the stock: 6,050 yen, versus 5,640 at Monday close.
• Fanuc Corp., "well positioned to benefit from the structural increase in demand for robots." Price objective: 26,000 yen, an 18 percent jump on Monday's close.
• Fujitsu Ltd., which has a "competitive edge in the solid domestic IT services market." Price target: 860 yen, compared with 791.20 on Monday.
• Otsuka Corp., an IT services company that BOFAML targets for a rise to 7,100 yen, from 6,750 on Monday.
• Trend Micro Inc., an Internet-security software provider. Price objective: 6,200 yen, against 5,500 on Monday.
• NTT Data Corp., another IT services provider. Price target: 6,900 yen, versus 5,870.
• Komatsu Ltd., a construction machinery provider whose "smartconstruction system gives it an advantage over its competitors." Price target: 3,300 yen, versus 2,685.50.

Those that are set to struggle include FamilyMart. BOFAML analyst Hidehiko Aoki expects its personnel costs to rise 8 percent -- or 11.7 percent of expected operating revenue in the 2018 fiscal year. The bank set a price objective of 4,000 yen on the stock, some 37 percent lower than its Monday close.

The chemicals industry is one where "staffing difficulties have limited production capabilities" already, the BOFAML team said. Higher labor and other costs have also hurt steelmakers' earnings, they said.

Another investment to consider is Japanese government bonds linked to inflation, the analysts said. "Given the expected upward pressure on prices, we think JGBi offers value," they wrote.

To contact the reporter on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh