To grasp Japan, you need to step through the looking-glass

December 5, 2013 4:26 pm

To grasp Japan, you need to step through the looking-glass

By Peter Tasker

Far from fighting demands for higher wages, Abenomics encourages them, writes Peter Tasker

For anyone with memories of Britain in the 1970s, Abenomics is like a trip through the looking-glass. Instead of reining in credit growth, Japanese policy makers are trying to prod borrowers and lenders out of their torpor. Rather than preventing capital flight through exchange controls, the government of Shinzo Abe, prime minister, is pressing for big increases in overseas investment by Japan’s Godzilla-sized public pension fund. Far from fighting demands for higher wages, it is encouraging them.In the 1970s, British prime ministers would invite union leaders and heads of industry to Number 10 Downing Street to thrash out wage deals over beer and sandwiches. Mr Abe has yet to invite Japan’s equivalents to sushi and sake at his official residence, but he has let it be known that the government wants to see higher wages next year.

The political calculus is clear. Blue-chip exporters quickly benefited from Abenomics, as quantitative easing – Japan style – drove the yen lower. With the Nikkei Index at the highest level in dollars since the turn of the century, the financial sector has done well, too. Ordinary workers, however, have not. Wages have not risen, so the increase in energy prices has meant declining living standards. Worse, the government has decided to squeeze purchasing power further by hiking the value added tax next April.

Mr Abe depends on public support to push through his programme. His polling numbers are unprecedentedly high for a Japanese prime minister after one year in office, and the Chinese leadership appears to be doing its best to keep them there. Even so, there are limits to public patience. Stagnant wages and rising prices are not what voters had in mind when they handed Mr Abe his landslide victory in December 2012. Hence angst about the outcome of next year’s shunto wage negotiations.

Shunto literally means “spring struggle”, but there has been precious little aggression from the (mainly company-specific) unions during Japan’s long deflationary winter. Employment income, like many economic indicators, is no higher now than in the early 1990s. Changing such a deeply ingrained trend will not be easy. Large listed companies may be racking up record profits, but the small and medium-sized enterprises that employ two-thirds of the work force are not prospering on the same scale.

The problem is not just political. The core concept of Abenomics is the conquest of deflation, as exemplified by the central bank’s conversion to aggressive quantitative easing. Yet bond market prices imply that inflation is expected for the next 10 years at an average of about 0.5 per cent once you take out the forthcoming VAT hike – a far cry from the target of 2 per cent in two years. Some members of the Bank of Japan’s monetary affairs committee are questioning the bullish outlook. They are right to do so. The BoJ must and almost certainly will do more.

Ultimately, however, wages are the key to sustained reflation. Fortunately, some bright spots are appearing. The job-offer-to-applicant ratio is nearing parity. Some lower-paid workers are already doing better. According to Recruit, an employment agency, hourly rates for the part-timers who wash dishes and wait on tables in Tokyo restaurants are up 1.7 per cent on the year.

How can this be? In much of the developed world, the picture is of slack labour markets and cowed workers. But demographic shrinkage means that the size of the Japanese cohort entering the labour market is falling. Unlike many other developed countries, the country has not sought to defer the consequences through mass immigration.

Ironically, these very issues are often cited as causes for despair about Japan’s future. In the short term, they are reflationary. Longer term, it is just possible that higher wages could lead to more investment in skills and better use of human resources. By today’s conventional wisdom, that would be another trip through the Japanese looking-glass.

The UK’s beer-and-sandwiches approach to incomes policy never had a prayer, given the super- stimulatory macro settings of the times. In Japan’s case, Mr Abe’s moral suasion is in sync with monetary policy and, over time, the labour market should work in his favour, too.