The Bank of Japan headquarters in Tokyo. Image Credit: Bloomberg


  • Paycheck growth in Japan has continued to fall behind inflation.
  • Bank of Japan (BOJ) Governor Haruhiko Kuroda has argued that wages need to increase much more before the central bank's price goals can be declared as achieved.

Tokyo: Inflationary pressure that's pounding economies worldwide is hitting long deflation-ridden Japan too, and that's boosting shares of companies that can raise wages to retain talent.

That can be seen in the strong performance of exchange-traded funds that invest in Japanese firms that are bolstering spending on human resources, capital expenditure and research.

The JPX/S&P Capex & Human Capital Exchange Traded Funds has risen 1.7% so far this year, set for the biggest annual outperformance since 2018 versus the broad Topix index, which has fallen 5.1%.

The Bank of Japan (BOJ) said it would buy those types of ETFs in 2015 as part of a policy campaign to try to stop falling consumer prices. The funds put higher weightings on companies that are making efforts to boost their human capital spending, such as high payers like Keyence Corp. and Nintendo Co.

Paycheck growth in Japan has continued to fall behind inflation, and BOJ Governor Haruhiko Kuroda has repeatedly argued that wages need to increase much more before the central bank's price goals can be declared as achieved.

But with the nation's inflation hitting 3% for the first time in over three decades, corporate managers are facing pressure to boost salaries to attract and keep their best employees.

"There will be an increasing gap between companies that can raise wages and those that can't," said Tomohiro Okawa, chief executive officer of PS Oskar Group, an investment advisory firm. Companies that have solid earnings or strong balance sheets and are able to afford wage raises "can retain talent and improve productivity, so the share prices of such firms tend to do well."

The BOJ said in December 2015 that it will buy ETFs "composed of stocks issued by firms that are proactively making investment in physical and human capital," as well as index-linked funds.

The central bank has purchased 1.5 trillion yen ($10 billion) of the wage-focused ETFs in the five years to March 2021, with little to show for it in terms of workers' salaries.

That may be changing. Accelerating inflation and a tightening job market are pushing company managers to pay more for talent. Game maker Capcom Co., for one, said in March it will raise base wages by 30%. Since then, its share price has advanced 26% compared with a 3% decline in the Topix.

Trade volume of the JPX/S&P ETF rose to a daily record on Oct. 19 and it's stayed active since then, underscoring investor interest in wage-raising firms. Similar funds have done mostly better than the benchmark.

Prime Minister Fumio Kishida is also pushing for more flexibility in Japan's rigid labor market, which has been long criticized as holding back growth in Asia's second-biggest economy.

"The government is encouraging workers to changes jobs if needed and telling companies to raise wages," said Takatoshi Itoshima, a strategist at Pictet Asset Management. "I bet only companies that can hike wages can survive."