Chart 13: Real labor income and private consumption Chart 14: Workers’ saving rate at all-time high 270 330 22 265 - 320 20 260 310 18 255 - 300 16 250 290 14 245 280 12 ike) ico) med foe) [o>] Q x N ise) s+ Ww ico) Ss se 8S 8S SE SSESESESES 10 aa ae NN NY NY NS SS ON STM O MAN HM DOr tR OM OH BA LH MS Eee he wsmnnonoeoeegmoelhDh Dm OO OD Oo LTSlLlUlUDLT 2Se2e2e2e22 2222 RRR ARKAN ——— Real employee compensation, JPY trn saar (LHS) ; ; ‘5 Private consumption, JPY tn saar (RHS) —— Saving rate of workers’ households, % 4qtr ma Source: BofA Merrill Lynch Global Research, CAO Source: BofA Merrill Lynch Global Research, MIA 2. Capex revival We also see a fundamental case for higher capital spending. Borrowing rates are very low and will fall further in real terms as inflation rises. Stronger growth and improved confidence should also encourage higher capex. And deepening supply-side constraints offer a strong incentive for Japan Inc. to accelerate productivity-enhancing capex, ensuring that this expansion is durable. For these reasons, we think that the impulse of capital expenditures will likely be higher in the non-manufacturing sector, where capacity utilization rates are higher, and labor shortages (and hence wage pressures) are more acute (Chart 15 and Chart 16). Chart 15: Capacity utilization rates by sector Chart 16: Labor shortages by sector 10 Insufficient AO Insufficient 0 -20 : 10 0 20 20 30 40 40 Excess 60 Excess 2003 2005 2006 2007 2008 2010 2011 2012 2013 2015 2016 2003 2005 2006 2007 2008 2010 2011 2012 2013 2015 2016 =———BoJ Tankan production capacity - manufacturing, DI =———BoJ Tankan employment conditions - manufacturing, Dl = =BoJ Tankan production capacity - non-manufacturing, Dl == BoJ Tankan employment conditions - non-manufacturing, DI Source: BofA Merrill Lynch Global Research, Bo} Source: BofA Merrill Lynch Global Research, Bo} Chart 17 shows the ratio of personnel costs to sales, using MoF corporate survey data. The ratio is particularly high for