Why an extra $26 a month may decide fate of Abenomics

March 12, 2014 6:28 am

Why an extra $26 a month may decide fate of Abenomics

By Jonathan Soble in Tokyo

Will they or won’t they? Observers of Japan’s economy have been asking that soap-opera-fan question for months. Will Japanese companies, basking in record profits thanks to a weak yen, pass the wealth on to their employees by increasing their pay?

The answer, which many think could determine the future of Abenomics – Prime Minister Shinzo Abe’s campaign to beat deflation and rev up growth – looks like a qualified yes. On Wednesday Toyota, Honda and Toshiba – flag-bearers for Japan Inc whose wage decisions reverberate through the broader labour market – all told their unions they would increase average monthly salaries in the fiscal year starting April 1.

Yet it is the qualifications that may matter more than the yes-or-no answer. Economists cautioned that the relatively small increases agreed during the annual shunto – unions’ “spring offensive” – may not be enough to push up workers’ real purchasing power and support consumer spending, an outcome that is crucial to the virtuous circle of rising prices, wages and growth that Mr Abe wants to foster.

Such concerns are shared by the government, and are reflected in the unusually strong pressure that Mr Abe’s administration has put on companies during this year’s pay negotiations. Akira Amari, economy minister, this week went so far as to threaten unspecified sanctions against “unco-operative” groups.

“The government has given companies the resources by moving corporate tax cuts forward,” he said. “If companies don’t respond, even though their profits are rising, they won’t be co-operating to create a positive economic cycle, and I think there will be some kind of action from the industry ministry.”

The base-pay increases accepted on Wednesday were the first since before the global financial crisis, but they were smaller than workers had demanded. Toyota said it was willing to add an average of Y2,700 ($26) per month to standard seniority-based rises, a “base-up” of less than 1 per cent and smaller than the Y4,000 its union had wanted.

Economists say base-pay increases are more important than their smallish yen values suggest, since they are harder to undo than overtime or bonus pay and are therefore more likely to be spent. In straightforward income terms, bonus pay fluctuates much more and makes a bigger difference – Japanese workers earn an average of one-quarter of their annual incomes as seasonal one-offs, according to Nomura, and in good years can earn much more.

Toyota may only have agreed to raise base wages enough for a couple of meals at McDonald’s, but it will pay bonuses equal to 6.8 months’ salary in the coming year, the full amount the union requested.

There are other reasons for cheer as well. With unemployment now below 4 per cent, pay for mostly non-union contract and part-time workers has also started to creep up. And a salary cut imposed on hundreds of thousands of civil servants to help fund reconstruction in areas devastated by the 2011 earthquake and tsunami is about to expire, giving another boost to average incomes.

Yet caution is warranted, economists say. Today fewer than one in five Japanese workers belongs to a union, and companies are increasingly turning to lower-paid part-timers and contractors to save money and cushion against downturns. That means “spring offensive” gains have less impact on overall incomes than they once did: including fixed seniority-related raises, monthly pay for the average unionised worker at a big company has gone up every year, financial crisis included, even as total earnings have dwindled.

Hiromichi Shirakawa, chief Japan economist at Credit Suisse, calculates that the deals reached this spring will “fail to lead to any meaningful positive base pay hike in all-worker terms”. Monthly pay increases at leading firms ranged from 1.5 to 1.8 per cent in the current fiscal year, despite a scarcity of “base-up” supplements to seniority pay, yet economywide wages still managed to fall 0.5 per cent between April and January.

An added problem is that the small businesses that employ a majority of Japan’s workers are more reluctant to raise pay. Even some profitable listed groups are sitting out this year – Suzuki Motor and Daihatsu, the Toyota-affiliated microcar maker, both refused union demands for base-pay hikes.

The pay debate has taken on greater significance because of a looming increase in Japan’s national sales tax, set for April 1. The Bank of Japan, under Mr Abe’s money-printing governor Haruhiko Kuroda, has succeeded in pushing up inflation to a five-year high – the headline consumer price index rose 1.4 per cent in January. The government and many economists see this as preferable to deflation, but it has suppressed real incomes, and the 3 percentage point tax hike will add further to the cost of living. Even with the agreed pay rises, many experts say, buying power may not keep up.

“Wage growth remains sluggish, and the sales tax hike will further undermine household purchasing power,” says Marcel Thieliant, an analyst at Capital Economics.

Yuriko Tanaka, of Goldman Sachs, notes that overtime has started to fall after rising in late 2013, as companies ramped up production to meet a pre-tax-rise spike in demand.

“Consumer prices are likely to be lifted by at least 2 percentage points after the tax hike, and we expect nominal wages to remain sluggish as overtime pay decreases,” she says. “In our view, a severe weakening in consumer sentiment from April will be unavoidable.”