JCER: Higher Pay Essential To Revitalizing Japan

When Prime Minister Shinzo Abe urged business leaders to increase wages during a meeting with them on Feb. 12, the response was hardly enthusiastic. But unless Japanese start making more money, the economy may miss an excellent opportunity to finally pick up.

The last Japanese economic expansion was from February 2002 through February 2008. At 73 months, it was the longest postwar growth streak. But with the exception of some people who worked in export-oriented sectors, few actually directly benefited from the boom.

According to the monthly Economy Watchers Survey conducted by the Cabinet Office, the household activity-related diffusion index was below the boom-or-bust line of 50 for 61 of those 73 months. But corporate earnings were solid over that period, especially at companies in the export-oriented sector. Aggregate net income of companies listed on the Tokyo Stock Exchange climbed to a record 22.273 trillion yen for fiscal 2007.

Out Of Balance

Several reasons have been given for the disconnect between strong corporate performances and consumer confidence. Many economists say the unwillingness of companies to raise wages is the main reason consumption was not impressive during the expansion.

Data compiled based on the United Nations System of National Accounts, an international standard system of national accounts, points to a decline in labor's share of income. In 2001, companies distributed 72.4% of their value added to employees. This figure shrank to 67.0% in 2007.

Many corporate executives attributed the shrinkage to a shift in where their revenues were coming from, saying most of their profits were being generated at their overseas operations.

"Domestic operations did not contribute to profits, so there was no reason to raise wages of Japanese employees," said an auto-industry analyst at the time.

Labor deregulation introduced in March 2004 also contributed to lower wages at manufacturers. Before the legal revision, only nonmanufacturers were allowed to accept temporary workers. But the Revised Worker Dispatching Act allowed manufacturers to hire temps, helping them maximize production efficiency.

Unlike in Europe, where the "equal pay for equal work" rule prevails, Japan has no rule limit on how much a company can depend on temporary workers, and many large manufacturers started using temps in Japan to cut labor costs.

Wage Warrior

Abe probably had these developments in mind when he urged corporate leaders to hike wages. Also, he wants to boost households' disposable incomes before the consumption tax rate is increased in April 2014. He also knows that pay hikes are key to maintaining the public's support at a time when he is pressuring the Bank of Japan to adopt a 2% inflation target.

But at the prime minister's Feb. 12 meeting with business leaders, the general reaction from the business community was not very encouraging. Hiromasa Yonekura, chairman of the Japan Business Federation (Keidanren), repeated the lobby group's basic view that companies will pay good bonuses if they can expect a strong business performance.

At a press conference later the same day, Yonekura would not say whether pay increases would come before an end to deflation is seen. Abe wants to use a pay hike as a catalyst to boost demand, but the business community does not appear to share his enthusiasm.

Crisis Of Confidence

Unlike with what happens with business sentiment, consumer confidence has historically tended to worsen when the yen weakens. This is partly due to the price increases that happen with imported daily necessities, such as food and gasoline, and also because of the impact on sentiment -- for many, a weak yen equals a declining Japan.

As Abe pointed out in his policy speech on Jan. 28, the biggest crisis facing Japan is the loss of confidence among the people. Teaming up with business leaders to avert a further decline in sentiment is essential to revitalizing Japan.

Masataka Maeda
Senior Economist
Japan Center for Economic Research