Photo/Illutration An electronic stock board shows the Nikkei 225 index exceeding 30,000 yen on the street in Tokyo’s Chuo Ward on May 17. (Jin Nishioka)

Japanese companies are showing strong earnings performances while stock prices continue rising.

This is a welcome upturn in the economy, which remained sluggish during the COVID-19 pandemic. But wage hikes have so far been unimpressive even though shareholder returns have increased significantly.

To ensure sustained economic growth driven by consumer spending, companies should ramp up rewards to workers.

The companies listed on the former First Section of the Tokyo Stock Exchange are expected to report record-breaking levels of net profits for the fiscal year that ended in March. They are also projected to continue racking up hefty profits in the fiscal year ending in March 2024.

As train and airplane passenger traffic recovered, the three Japan Railways companies operating in Japan’s Honshu main island and major airlines regained profitability. Higher energy prices have caused electric utilities to slip into the red while proving a big boon to trading houses.

Mitsubishi Corp. and Mitsui & Co. saw their net profits top 1 trillion yen ($7.26 billion) for the first time. A weaker yen has boosted the yen-denominated profits from overseas operations. Five of the seven major automakers increased their profits.

If Japan’s economic recovery is attracting foreign investors and pushing up stock prices, this is good news.

However, it should be noted that many companies have recently been focusing on shareholder returns such as increased dividends and share buybacks, and such moves have made their stocks popular among investors.

In March, the Tokyo Stock Exchange urged companies whose market valuations are below their net asset values to take steps to improve their management. Since then, a growing number of companies have announced measures to return profits to shareholders.

We should not be pleased about the large number of companies that have amassed massive profits but cannot make effective use of the money they have earned through standout performances. In some cases, the money should be returned to the shareholders.

But the effects of a share buyback used as a quick fix for the problem will be temporary. A rise in stock prices supported by such a measure does not last long.

The TSE itself cautioned against this approach, saying its request is not a call for “a temporary response.” Companies should instead try to use their funds effectively to raise expectations for their futures so that their stock prices will rise as a result.

Critical to a company’s long-term growth are future-oriented investments including spending to develop human resources and pay raises to reward its workers.

A certain level of wage hikes was achieved in this year’s “shunto” spring labor negotiations. But the pay growth was not enough to compensate for higher prices. If households’ incomes decline in real terms and depress their purchasing power, companies will have to pay a price.

On the other hand, further wage hikes leading to increased consumer spending will help companies achieve sustained growth. Given the strong profit prospects, it can be assumed that many Japanese companies can afford to offer additional wage increases.

In many other major countries, rapid interest rate hikes to curb inflation have put a crimp on the economy. A series of bank failures in the United States has also generated concerns about a possible financial crisis.

It is vital to put domestic demand on a firm footing to make the Japanese economy less vulnerable to an economic downturn overseas.

--The Asahi Shimbun, May 19

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