The virtuous cycle is stuck

Why wages remain stagnant in Japan

Text by Justin McCurry

Last month brought a rare piece of good news for Japan’s 65 million workers: their wages had risen by 0.4% in real terms in 2016, the first year-on-year increase in six years, according to government data.

The modest rise was a rare bright spot in an otherwise futile effort to realise Prime Minister Shinzo Abe’s “virtuous cycle” of robust wage growth and consumer spending.

His economic programme, referred to as Abenomics, depends on increasing corporate profits that will, in turn, bring higher wages and a loosening of household purse strings. Ultimately, so the theory goes, Japanese consumers will overcome unease about future pension and welfare costs, and spend their way out of deflation.

The anaemia afflicting wage rises has some economists scratching their heads. Unemployment is at a mere 2.8% — its lowest rate in over 22 years — and the national ratio of job offers to job seekers was at 1.48 in April, a 43-year high. Moderate economic recovery and an ever-tightening labour market should be the ideal backdrop to thicker wage packets.

Instead, Japan is turning conventional economic theory on its head. Rather than converting profits into higher salaries, companies are simply sitting on their cash, aware that incremental rises in base pay could lock them into an upward trajectory that would make surviving the next economic downturn that much harder.

“Japan is not following the textbook route,” said Naohiro Yashiro, a noted free market economist and visiting professor of economics at Showa Women’s University. “We have all heard of downward rigidity, but there is also upward rigidity. Companies are afraid that, if they raise the basic wage, they won’t be able to lower it during a recession.”

Instead, firms adjust remuneration by tweaking bonuses, said Yashiro, who is also a member of Abe’s Regulatory Reform Promotion Council.

Almost two-thirds of Japanese companies do not plan to hike their workers’ wages this year, according to a recent Reuters poll, striking yet another blow to the Bank of Japan’s goal of achieving 2% inflation by 2018.

While major EU economies, notably Britain, are also battling stagnant wages and the expansion of the “gig” economy — in which larger numbers of young workers are employed on zero-hour contracts — Japan has struggled more than most to translate a healthy job market into wage growth.

Sitting on cash reserves rather than showering them on hard-working employees is at the heart of Japan’s wage conundrum, according to Professor Charles Weathers, a labour relations expert in the graduate school of economics at Osaka City University.

Weathers blames wage stagnation on the culture of “excessive wage restraint” created by the first oil shock in 1975 and the use of bonuses in lieu of pay rises. While he acknowledged that government intervention in wage negotiations have brought successes — such as at Toyota — over the past four years, he added that “the raises are not big, and the impact rarely reaches the hardest-pressed workers.”

Several rounds of stimulus under Abe have failed to nudge companies into raising wages. Without more cash in their pockets, households are locked into the thrifty habits that have held back consumption-driven growth.

“The Japanese labour market is unambiguously as tight as it ever has been in history. Yet wage inflation remains moribund,” wrote Albert Edwards, global strategist at Société Générale in London, in a note to clients. “It is not that Japanese companies haven’t got the cash to splash around if they so choose. Japanese corporate profits have boomed since Abe came to power at the end of 2012.”

Indeed, major firms expect to set another record for combined net profit for fiscal 2017, due to overseas demand and a weaker yen, according to SMBC Nikko Securities Inc.

Direct comparisons with the European Union are tricky, given the disparate condition of EU states’ economies and the fact that national governments, not Brussels, set wage policy.

Barbara Gerstenberger, head of the working life unit at the European Foundation for the Improvement of Living and Working Conditions, said: “It is difficult to generalise the developments in the European Union countries, as in recent years we have seen diverging developments across the continent.”

While wages are rising in eastern European member states, many EU governments consider pay rises harmful to international competitiveness, according to Michael Dauderstädt, a Germany-based freelance consultant who has written extensively on EU wage policy.

“Most recently, Germany has been promoting wage increases through the introduction of a statutory minimum wage and decent wage rises in the public sector. But this comes after years of wage restraint,” added Dauderstädt. “In Germany, I have the impression that companies are ready to pay higher wages due to low unemployment and an increasing scarcity of qualified labour.”

In Japan, the rise of haken, or contract workers, over the past two decades has placed further pressure on wages, prompting Abe to commit himself to “equal pay for equal work”. This means, ideally, that there will no longer be wage discrimination between regular and non-regular workers, who account for about 40% of the workforce. However, few realistically expect wage parity between the two workforces.

In spite of this, Yashiro believes there is cause for optimism. After the failure of years of large-scale stimulus to prompt wage rises and consumer spending, he and other experts are coming up with new ideas they believe can succeed where Keynesian economic policy writ-large has not brought about the desired results.

Yashiro is calling on the government to address wage stagnation in Japan’s huge care industry, which, he says, is still stifled by a quasi-socialist resistance to private sector involvement.

“If we can move towards a market-based system [in the care sector], then we have the potential to increase productivity and wages through economic growth,” Yashiro said. “There has traditionally been a lot of opposition to this, but Abe is moving in that direction.”

Osaka City University’s Weathers also noted that workers in public service-type jobs — especially nurses, childcare workers, elderly-care workers and teachers — are unable to make a living wage unless the government essentially subsidises their salaries.

“Abe would like to raise their wages because he wants to promote career opportunities for women, but the government is already in fiscal hell — at all levels,” Weathers notes.

One voice that is frequently missing from the wage debate is that of the workers themselves, despite growing concerns across developed economies regarding rising inequality and poor job security.

While unions in the EU are now pushing for wage rises, their Japanese counterparts have been criticised for abandoning the aggressive shunto pay-hike campaigns of yesteryear in favour of protecting profits at a time of economic uncertainty and tough international competition.

“Companies are withholding profits because they want to avoid taking risks,” said Koki Tanaka, an official with the Japan Federation of Newspaper Workers’ Unions and a critic of Abe’s economic policy. “Their main interest is in reducing personnel costs.

“Another factor is globalisation,” he added. “If firms can cut costs by basing their business operations overseas, they just don’t see the need to invest in domestic labour.”  •