Compensation dynamics are commanding investor attention once more. For the first time in decades, Japan's pay increases—finalized at +5.46% in this year's shunto negotiations—have notably exceeded compensation growth rates in the United States. The Atlanta Fed’s wage growth tracker put the median U.S. wage on a 4.3% annual growth rate last month.
This shift, where Japanese workers are suddenly witnessing their compensation grow at a faster clip than American rivals, is acknowledged by some in the market but has barely registered with global investors. Crucially, today's acceleration in Japanese pay is on par with the boosts Japanese employees used to get in the go-go 1980s. However, today’s set-up has sharp contrasts to that era. For one, late-80s Japan was characterized by a giddy mania, shockingly high equity valuations and a property bubble that was unprecedented at the time. Today, a rebounding Japanese consumer theme is coming at the same time as the country engages structural corporate governance upgrades and meaningful policy initiatives that are designed to boost long-term productivity and economic resilience.
Japan’s improved investor climate is underscored by tangible metrics: in 2024, share buyback pledges jumped 75% year-over-year, accompanied by a 41% increase in private equity and venture capital commitments and a 67% uptick in shareholder proposals for corporate board changes. These factors align with the compensation boost narrative, strengthening the argument for valuation upside in Japanese equities relative to pricier markets, notably the US.
Still, rising paychecks are not without drawbacks from a Japanese stock market perspective. Higher labor costs could squeeze corporate margins unless we see productivity gains. In the U.S., while pay continues rising due to tight labor market conditions, inflation-adjusted gains remain modest, potentially dampening consumer strength.
There's also a noteworthy “consumer vs consumer” concept unfolding between Japan and the US. While American households seem a little hesitant—evidenced by the recent pullback in the University of Michigan’s consumer sentiment survey—the Japanese consumer is maybe, and we emphasize “maybe,” shaking off decades of stagnation now that paychecks are no longer stagnating.
Japanese equities, undervalued for decades, now present a compelling case for relative outperformance. We were recently doing some work on price-to-book ratios, a metric that some readers avoid due to the skew of accounting conventions, which have assets valued at historic costs instead of real-world prices. Nevertheless, it’s an important ratio to observe right now because it is the one that is most often cited in the country’s corporate governance reform push. As we write, the Datastream aggregate price-to-book ratio for Japan is 1.09. In the US, the figure amounts to 4.63, which is higher than Japan’s 1989 peak around 4.0 and just short of the 5-handle the US witnessed in the Dot-com era. It is also a smidge higher than the levels that preceded the 2022 bear market. For investors who are putting a question mark on the direction of the US stock market, engaging a Japan long for a price tag of 1.09 times book may make some sense, especially if rising Japanese paychecks get diverted to stock market purchases.
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