Chart 17: Personnel costs to sales, % ratio 4qtr ma (as of Apr-Jun 2016) 40 35 30 25 20 15 , j 10 5 0 © P ® F © GS S$ © VF S&S SM CHK. @ & ees ee oe s FS oe eee & FS we SEE EOS LE g & SLL FL F Ss x > & we Ss x ~ e ae & & o& se oe es aw Pras? S e v Ry < 2 of Source: BofA Merrill Lynch Global Research, MoF Analysis by METI suggests that many of these non-manufacturing industries have the scope to raise productivity. Wholesale/retail, utilities, and eating & accommodation have particularly low levels of productivity relative to the US (Chart 18). We think the solution is to boost capex, especially in ICT and automation. More broadly, an acceleration in capex is needed if we are to see a pick-up in productivity and sustained profits. Though we are by no means in the late stages of the profit cycle, the trend clearly points to higher wage costs going forward, requiring proactive efficiency-enhancing investment by corporates. Bottom-up data capex data for MSCI Japan also suggest that the investment cycle has troughed and will pick up next year as earnings momentum improves (Chart 19). Chart 18: Japan's labor productivity relative to the US: services is low Chart 19: Capex — YoY change in Japan vs Global Earnings Revisions (2003-07) 18 30% 140 420 3° 20% 100 sn ee = 14 - s 80 i j 2 49 , ho ar ; = | fil: ph ] | 3 1.0 h 7 0% is 0 2° | -10% S © Ss WM © © & ») © g 06 a se » es ~ ee x A Ss oe e $ 04 -20% ™ eS oe & se Rs FF ee s * re ar a oe SS e 0.2 30% “ “ ¢ ¥ & 90 92 94 96 98 00 02 04 06 08 10 12 14 16 me Global Earnings Revision Ratio (LHS} == IMSCI Japan capex %YoY (RHS} Source: BofA Merrill Lynch Global Research, METI Source: BofA Merrill Lynch Global Quantitative Strategy 3. Policy priorities and redistribution We think an increase in government pressure on corporations could speed up income redistribution at the margin, ensuring that money circulates to those sectors and agents with a higher propensity to consume. Elevated corporate savings remain a focal point for the g