Improvement in Japan SMEs' earnings is also likely to benefit wages

Japan non-financial companies' recurring profits totaled ¥18,065.1bn and their recurring margin reached 5.3% in October-December 2014, the highest levels since the data started.

The improvement in corporate earnings and profit margins since 2013, when Abenomics got under way, had been led by large companies. However, the improvement in the Oct-Dec quarter was most notable among SMEs.

SMEs have started to catch up to large and midsize companies in terms of profit margins, thanks to low oil prices. 

BofA Merrill Lynch notes in a report on Monday:

• We think an increase in SMEs' personnel costs (wages) have much macro significance because these companies account for a high proportion of total employment.
  
  
• These small companies account for nearly half of total employment, and the average compensation per worker at these small companies rose 0.2% yoy in 2H 2014, the first increase since 1H 2005 (0.1%), probably thanks to the improvement in profitability.
  
  
• If small companies' margin improvement leads to steady wage increases, the overall rise in workers' compensation would get an additional boost.