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Contractors feeling impact of ‘Abenomics’

Builders raising wages, selling bonds as Abe's stimulus kicks in

by Katsuyo Kuwako and Emi Urabe

Bloomberg

The construction industry is raising wages and selling bonds as Prime Minister Shinzo Abe’s stimulus policies cause labor shortages and a need for funds.

Obayashi Corp., the country’s second-largest contractor by market value, raised ¥10 billion in a sale last Friday of five-year bonds at a 15 basis-point yield premium to government debt, according to data compiled by Bloomberg. It paid 21 basis points for similar-tenor notes a year earlier.

The average spread for Japanese companies’ debt securities was 23 basis points and 112 for corporate borrowers worldwide, a Bank of America Merrill Lynch indexes showed.

The government’s “Abenomics” stimulus efforts, including rebuilding the Tohoku region devastated by the 2011 quake and tsunami, created job shortages that forced Abino Construction Co. to raise the pay of dump truck drivers to ¥60,000 per day — double what was paid a decade earlier.

Obayashi, which is forecasting its biggest annual profit in seven years, has completed eight bond sales since August 2010 after a six-year absence from the market.

“Obayashi and its general contractor peers are feeling the boost from Abenomics policies that have improved their business environment,” said Kazuma Ogino, a credit analyst in Tokyo at Nomura Securities Co., the nation’s biggest brokerage. “Another reason for the lower borrowing costs is the overall tightening of spreads in the bond market.”

The average yield premium investors demand to own notes sold by Japanese companies has dropped 23 basis points since Abe’s Liberal Democratic Party won power in the December 2012 general election, Bank of America Merrill Lynch index data show. Corporate debt offerings have decreased 28 percent to ¥2.3 trillion this year, even as borrowing costs fell to the lowest since August 2007, according to Bloomberg data.

Obayashi’s weighted average fixed coupon declined to 0.75 percent from 1.3 percent in the first quarter of 2010, the data show.

“Demand for construction work is extremely robust,” said Mitsuyoshi Takahashi, a senior credit analyst at Mizuho Securities Co., a unit of Japan’s third-largest bank. “The disaster recovery demand is just beginning to pick up. The private sector environment is also showing recovery.”

Abino Construction, which is based in the city of Himeji, Hyogo Prefecture, is struggling to attract dump truck drivers even after increasing pay, said CEO Tsuyoshi Abino. Many potential employees have left to work in Tokyo or the Tohoku region, he said.

Tempstaff Co., the country’s leading temporary staff agency by revenue, is seeing surging demand from companies for clerical workers, especially in the finance, construction and information technology sectors, said spokeswoman Kiyoko Nakamata. The agency plans to boost the fees it charges companies for temporary workers by 3 to 5 percent.

“The labor shortage means private and public projects are struggling to have their construction jobs taken on,” Mizuho Securities’ Takahashi said. “The contractors are in a position to choose their work and, of course, they are choosing the most profitable projects.”

Obayashi earlier this month increased its full-year profit forecast by 50 percent to ¥21 billion in the year ended March 31, the most since it earned ¥40.7 billion in fiscal 2006. The company has ¥80 billion in outstanding bonds and is ranked A+ by Japan Credit Rating Agency Ltd., its fifth-highest investment grade.

The prime minister called on companies to raise wages faster than inflation “to enter a virtuous cycle as quickly as possible,” where economic growth propels corporate profits, employers increase compensation and workers spend more, in a Dec. 6 interview.

The Bank of Japan is buying about ¥7 trillion in sovereign notes a month to achieve Abe’s goal of accelerating inflation to 2 percent. While the stimulus has benefited exporters by weakening the yen and making their products more competitive abroad, construction companies and energy importers are faced with higher costs for raw materials.

Consumer prices rose 1.6 percent in March from a year earlier, matching the advance in December that was the fastest gain in five years, according to a government report. Labor cash earnings increased 0.7 percent in March, beating the 0.1 percent estimated by economists and marking the biggest jump since March 2012.

Toyota Motor Corp., forecasting a record ¥1.9 trillion profit this business year, agreed to increase base wages in Japan for the first time since 2008. The average Toyota Motor Workers’ Union member will earn ¥2,700 more in base pay per month, the nation’s largest carmaker said on March 12. Toyota also will pay an average bonus of ¥2.44 million — the equivalent of 6.8 months of salary and the most in six years.

Panasonic Corp. on the same day agreed to raise base pay by ¥2,000 a month.

“Even with labor shortages and rising material costs, construction companies should see improvements in profitability,” Nomura’s Ogino said. “The industry is moving away from a situation of having to accept orders on the cheap.”