(Bloomberg) -- Japan’s stock market needs to see more domestically-oriented companies step up their game to fuel further rallies, but the outlook for wages and the yen complicates the picture.

The focus has turned to earnings announcements for the fiscal year ended March 31 for sectors that are underperforming the broad Topix Index, such as transport, retailers and food companies. About 60% of Japanese firms report in the weeks ahead.

The surge in Japanese equities since last year has been powered mainly by exporters including carmakers and chip-related firms, which benefited from a depreciating currency and semiconductor demand. But the weak outlook for the global chip market and cautionary comments about the yen’s plunge from Japanese business leaders have weighed recently.

This has shifted the attention to whether domestic market-oriented laggards may be able to bring some bullishness back to the market. These shares have risen less than 20% in the past year, compared with more than 30% gains in the Topix.

One key factor is whether salary increases will outpace the rise in inflation, especially as companies are finding it a challenge to fund pay raises as Japan emerges from decades of deflation. Real wages, which are adjusted for inflation, fell in February for a 23rd straight month. 

“Wage hikes means companies will need to cut some margins - whether they are able to cover the cost is in focus this earnings season,” said Hiroshi Matsumoto, a senior client portfolio manager at Pictet Asset Management Japan Ltd. “Despite continuous negative real wage growth, if we could confirm that more price hikes are possible going forward, that would support the market.”

Earnings Guidance

Investors will also be carefully assessing full-year guidance by companies, which often turns out be too conservative. 

Analysts expect earnings per share for Topix shares in the next 12 months will hit ¥170.3 ($1.1), rising 3.9% from current levels, according to Bloomberg-compiled data.  

JPMorgan Securities forecasts that firms’ guidance for net income will decline 4% in the fiscal year ending March 2025, which would be worse than the 10-year average. That leaves the potential for upward revision, according to strategists including Rie Nishihara.

There are signs though that rising living costs have prevented shoppers from increasing spending, and a key measure of consumption activity has declined for two straight quarters.

 “Companies have been able to pass on cost increases, but it’s still unclear if wage hikes will result in more demand and contribute to pushing service sector shares higher,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. “If real wage growth turns to positive and companies raise their guidance in their next earnings releases, buying momentum would expand to the overall market.”

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