Abenomics Payday Still Awaits; Spending Worries Weigh on Japan’s Rebound; Abe’s Stimulus Program Has Lifted the Nation’s Economy, but Companies Are Reluctant to Raise Wages

Abenomics Payday Still Awaits

AARON BACK

Nov. 14, 2013 3:48 a.m. ET

Abenomics is at risk of stalling out unless workers start seeing fatter paychecks. So far, it doesn’t look good. The importance of household incomes was highlighted by Japan’s third-quarter gross domestic product growth, which slowed to an annualized rate of 1.9%, compared with 3.8% in the previous quarter. One key weakness: Household consumption rose just 0.1% from the previous quarter. Despite general euphoria around Prime Minister Shinzo Abe’s economic plan, regular folks aren’t seeing it in their pay, which, after all, is the ultimate gauge of whether Abenomics will be seen as a success by most Japanese.In the first half of the year household spending was up smartly, as the stock market surged and the yen weakened, both signals to ordinary Japanese that good times were returning. This now looks like a one-off spike. Rank-and-file workers have yet to see a rise in wages, even as they pay more for food and energy. Consumer confidence in October fell back to the lowest levels since late last year.

Base pay is still falling. Data from the labor ministry shows that base wages were down 0.3% from a year earlier in September. Many workers did get bigger-than-usual summer bonuses, but these are one-off increases that don’t give consumers the confidence to spend that comes with a permanent salary increase. Though prices have begun to pick up, they have been driven mostly by higher costs for imported energy and raw materials. More demand is key to ensuring a durable end to deflation.

What’s more, to tackle its giant national debt, Japan is set to raise the consumption tax from 5% to 8% in April. This will trigger a temporary surge in demand over the next few months as consumers rush to make major purchases ahead of the increase, but thereafter it will hit spending momentum hard.

All is not lost. There’s hope that the wage increases will come through eventually. Millions of workers’ salaries track labor negotiations that only happen before the next fiscal year starts in April.

Japanese workers have a strong hand, given the recent surge in corporate profits and a tighter labor market, with fewer applicants per empty position. And importantly, there is political pressure, with Mr. Abe jawboning companies for higher wages. Nonetheless, few businesses currently say they are even contemplating pay rises.

Ultimately, Japan’s corporations may well figure it is in their long-term interest to give workers a raise. If they don’t, Mr. Abe’s economic project will be a bust.

Spending Worries Weigh on Japan’s Rebound

Abe’s Stimulus Program Has Lifted the Nation’s Economy, but Companies Are Reluctant to Raise Wages

ALEXANDER MARTIN

Nov. 13, 2013 10:04 p.m. ET

TOKYO—Like many Japanese, Itsuka Nonoguchi has yet to see the benefits from her country’s economic resurgence.

Ms. Nonoguchi is spending more on gasoline to visit her mother in a nursing home and her family’s food costs have increased. At the same time, her husband, who works at a small company that installs electric wiring, sees little chance his ¥3.7 million ($37,000) annual salary will rise.

“There’s a lot of talk about the potential benefits of ‘Abenomics,’ but for me it’s just something people discuss on TV,” the 32-year-old homemaker and mother of two says.

Prime Minister Shinzo Abe’s aggressive monetary and fiscal stimulus program has lifted the nation’s economy from years of stagnation and falling prices.

But for growth to take hold, the government wants people like Ms. Nonoguchi, who lives in a suburb east of Tokyo, to feel more confident about the economy.

For now, that isn’t happening. The problem: Companies don’t believe higher prices are here to stay and are reluctant to raise wages. Unless that happens, growth could sputter, some economists say.

Gross domestic product expanded at an annualized pace of 1.9% in the three months to the end of September, the government said Thursday. Although slower than the 3.8% growth posted in the second quarter, the economy has been on an upswing for four consecutive quarters

The Nikkei stock index has risen 40% this year and a weak yen has boosted exporters’ profits. Consumer prices have started to rise for the first time in nearly five years.

Mr. Abe’s administration is hoping its stimulus efforts will instill a “virtuous cycle,” in which rising corporate profits lead to investment and higher wages, in turn spurring more consumer spending. The goal is to shift the economy’s gears to rely more on domestic private demand, rather than on exports and government spending.

Businesses, though, are holding out. Only eight of 105 companies in a survey published last week by the Yomiuri Shimbun newspaper, Japan’s largest by circulation, said they were considering raising base salaries.

Manufacturers still have large unused production capacity. Some companies that import heavily say they have been hurt by the weaker yen. Three-quarters of respondents in a recent survey of small businesses said conditions were either stable or worse than last year.

Without higher wages, consumer demand is starting to fade after expanding earlier this year in the early euphoria of Abenomics. A plan to raise Japan’s sales tax in April—an effort to rein in huge public debt—also is damping sentiment.

Japan’s consumer-confidence index this week fell back almost to levels when Mr. Abe was elected nearly a year ago. Consumer spending in September rose 3.7% from a year earlier as consumers rushed to purchase goods ahead of the tax increase, raising concern that spending could plummet in April.

Thursday’s GDP figures show that a slowdown in exports and personal consumption may have put the brakes on the economy’s fast growth. Exports fell 0.6% from the last quarter while growth in consumption slowed down to 0.1% from 0.6% the previous quarter.

Masayuki Sakurai, whose family operates a century-old fishing-tackle business in Tokyo, said he is reining in spending ahead of the sales-tax increase. “There’s no way we can be raising our employees’ wages,” he said. “If the situation turns for the worse, we may have to lay off some workers to survive.”

Many economists view higher wages as crucial to Japan’s ability to put deflation behind it. Wages rose from 1960 to 1980 as exports fueled rocketing growth. But salaries began to fall after the bursting of Japan’s asset bubbles in the 1990s.

Facing cost pressures, companies began to rely on poorly paid temporary and part-time employees, who last year accounted for over a third of the nation’s total workforce. Japan’s monthly average wage has fallen 18% since 1997 to just over ¥314,000 last year, according to the Japan Institute for Labor Policy and Training.

“Wages need to be raised for Japan to overcome deflation,” said Tsuyoshi Ueno, an economist at the NLI Research Institute in Tokyo.

While income disparity in Japan is lower than the U.S. and U.K., a report released by the health ministry in October showed that Japan’s Gini coefficient—a key parameter for measuring income inequalities—reached its highest ever level in 2011.

“The only option for many is to work in unstable jobs, sometimes in very harsh conditions with little employee benefits,” said Jinbu Akai, deputy director of a union which represents non-full-time workers.

Mr. Abe has raised the idea of labor overhauls aimed at reducing the gap in employment protections between full and part-time employees. But labor unions have opposed any change to the status quo.

That leaves many Japanese in a precarious situation—and unwilling to spend.

Yasuko Sekiguchi, a 65-year-old apartment supervisor in Tokyo, makes ¥160,000 a month. She and her husband rely on short-term contracts, adding to their feelings of insecurity.

“Society is becoming tough on people like us,” she said. “The gap between the haves and have-nots seems to be growing.”