Published February 19, 2013
TOKYO – Tight-fisted companies in Japan may prove the biggest obstacle in Prime Minister Shinzo Abe's plan to push the sluggish economy into higher gear as they intend to keep a firm lid on wage levels, a Reuters survey shows.
Abe has directly appealed to Japan's biggest business lobbies to raise salaries and break more than two decades of falling average wage levels, aware of how critical rising incomes are if Japan is finally to emerge from years of deflation.
But the Reuters poll shows Japan Inc is reluctant to play along.
About 85 percent of firms responding to a monthly Reuters Corporate Survey said they would maintain wage levels or cut them in the fiscal year starting in April.
Abe's gambit is that once a deflationary cycle of price declines that depress sales, business investment and incomes is broken, a virtuous cycle will kick in: investment will rise, leading to more, better paid jobs and greater demand.
Without wage rises, Japan could be left with "bad" inflation, where a weak yen pushes up import prices as household earnings stagnate. That would hurt, rather than boost, demand and growth.
It would also make life difficult for whoever Abe appoints to take the helm of the Bank of Japan next month with a mandate to reach a target of 2 percent inflation - a level Japan has rarely achieved in the past two decades.
"Companies could raise bonuses, but this won't lead to sustainable gains as long as base pay remains unchanged," said Yusuke Ichikawa, economist at Mizuho Research Institute.
"If people expect prices to rise but don't expect their wages to rise, then monetary policy would become ineffective."
Abe led his party to election victory in December with pledges to end nearly 20 years of deflation and aims to use the change in BOJ leadership to shift the central bank toward the aggressive expansion of its balance sheet that he favors.
Japan's average wages, which are closely correlated with consumer prices, have been declining since 1998, data from the National Tax Agency show.
In 2012, the average monthly earnings for Japanese wage earners stood at 314,236 yen ($3,300), the lowest level since comparable data became available in 1990.
Moreover, wages have been falling faster than prices with average earnings down 12.2 percent since fiscal 1997, while overall consumer prices have fallen 3.6 percent.
After the collapse of the 1980s bubble economy, many Japanese companies cut salaries to keep workers on the payroll instead of resorting to mass layoffs.
Since then, the pattern of pay getting cut during hard times and not coming back in upturns has stuck as companies suppress costs to compete against each other in a shrinking domestic market and against foreign rivals overseas.
To reverse this dynamic, companies need hope that domestic demand will finally start to grow after years of bouncing in and out of recession.
"Companies need to be confident about the long-term outlook for wages to rise, and just weakening the yen won't make companies confident," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.
"We need more structural policies to create new growth opportunities for corporates to become confident that growth expectations will pick up."
When Abe met leaders of the three biggest business lobbies last week, he argued that corporate profits will improve as fiscal spending boosts the economy and monetary easing weakens the yen, so companies should use the windfall to increase wages.
The hope is getting wages to rise will help spark the "good" inflation cycle that accompanies an increase in consumer spending. A modest rise in prices tends to generate demand because consumers aim to buy before the cost gets even higher. Deflation has the opposite effect.
EARNINGS OUTLOOK BRIGHTER
Japan's listed firms, 60 percent of which focus on exports, have been raising earnings forecasts in the past few weeks.
The yen's 16 percent tumble versus the dollar since November, when expectations started to mount that Abe would become the next premier, has been a boon for exporters.
But companies may need to see more than a steep slide in a currency that was changing hands at a record high in 2011 especially as many manufacturers have gradually shifted production to bases overseas as the yen rallied in recent years.
"It will take a great deal of time and effort for production that once left Japan to come back," Akio Toyoda, president of Toyota Motor Corp, told reporters last week.
"The yen, which was trading in the 70s against the dollar, has hurt the automotive industry more so than people imagine," Toyoda added.
As annual wage negotiations called "shun-to", or spring battle, get under way, some companies could eventually yield to union demands and agree to small increases in bonus pay, Mizuho Research's Ichikawa and BNP Paribas' Shiraishi said.
However, this will not lead to sustainable gains in wages, because companies are likely to suppress base pay, meaning 2 percent inflation will take much longer to achieve than Abe expects, both economists said.
"For wages to rise, demand needs to rise, it's that simple. The problem is that while there are certain areas of growth in Japan, like e-commerce, the overall pie is not growing," said Naohiro Muta, an independent management consultant.
Underlining the difficult task of reviving inflation expectations, 44 percent of firms said they expected consumer prices to start rising in 2014, while 27 percent see that happening only in 2015, and 18 percent said 2016 or later, the poll conducted for Thomson Reuters by Nikkei Research between February 1 and February 18 shows.
The survey involved 400 target companies split evenly between manufacturers and non-manufacturers and they respond under condition of anonymity.
Abe would argue that his government's economic growth strategy, which is due sometime mid-year, will lay out the longer-term structural solutions to Japan's ills, giving companies reason to believe domestic demand will improve.
But Japanese companies are not yet convinced.
"If labor costs rise, earnings improvement will stop, and there will be another economic downturn," said one survey respondent representing a wholesaler. ($1=93.99 yen)
(Additional reporting by Yoko Kubota: Editing by Tomasz Janowski and Neil Fullick)