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Low Wages Compound Japan's Grim Prospects

In Japan, bonuses are not what they once were. Just ask Keiko Shimoharaguchi.

Ms Shimoharaguchi, an employee of the health insurance arm of a major newspaper, looks forward to her biannual bonuses — a standard feature of Japanese salaried worker life — as a chance to splash out on non-essentials such as jewelry.

Woman on Escalator at Midtown Tokyo
B. Tanaka | Photographer's Choice | Getty Images
Woman on Escalator at Midtown Tokyo

But her 2011 end-of year bonus was down about 10 percent compared with the year before. And coming after previous sharp falls, the decline is having a direct impact on her shopping habits.

“In the past I got bonuses that would make me buy things just because they took my fancy,” Ms Shimoharaguchi says. “Now when I buy jewelry, for example, I buy cheaper things.”

Ms Shimoharaguchi is far from alone. Bonuses have been coming under heavy pressure in Japan for years as part of a wider effort to restrain incomes.

And while workers around the developed world have been complaining of a squeeze on incomes over the past two decades, in Japan thinner pay packets fuel wider deflation. That make it even harder for the government to rein in its runaway debt and for the central bank to use monetary policy to boost growth.

The National Tax Agency says average annual salaries, including bonuses, fell in nominal terms every year but one in the decade to 2010, sliding from 4.61 million yen to 4.12 million yen. The Japanese Trade Union Confederation (Rengo) says the average size of workers’ bonuses has fallen from a peak of 4.27 times monthly salaries in 1992 to just 2.83 times in 2010.

More recently, a faltering of Japan’s recovery from its deep 2008-2009 slump is threatening to further tighten the screws. Total cash earnings for Japanese salaried workers were down 0.2 percent in December compared with the previous year, while special payments, which are mainly winter bonuses, fell 0.3 percent.

Falling prices means that buying power has held up better than nominal data suggests. Japan’s consumer price index was also down 0.2 percent year-on-year in December, for example.

Yet analysts say that the stagnant wages are a major factor in weak domestic demand that has left Japan long reliant on its manufacturing export sector as a vital driver of economic growth.

More growth drivers are certainly needed. Battered by natural disaster, Japanese gross domestic product declined between October and December for the third time in four quarters. Corporate powerhouses such as Panasonic, Sony and Sharp have been warning of multibillion-dollar losses.

Amid growing international competition, uncertain demand and a rising currency, Japanese companies have been getting “leaner and meaner” by holding down costs such as wages, says Cameron Umetsu, economist at UBS in Tokyo.

“This is how Japanese companies are staying globally competitive… but that means there are unlikely to be any big consumption booms, and therefore no inflation,” Mr Umetsu says. “Japan ends up with sticky deflation.”

Japanese unions are gearing up for their annual shunto, or spring wage offensive, but most companies are expected to dismiss out of hand any major increases.

More than 70 percent of listed companies rejected pay-scale hikes in talks with organized labor ahead of the spring campaign, Kyodo news agency quoted a survey by a private-sector research institute as saying last month.

While policymakers bemoan the salary squeeze, political pressure is growing for heavy cuts to public sector pay as a quid pro quo for a proposed doubling of Japan’s 5 percent consumption tax. Shortly after becoming prime minister last year, Yoshihiko Noda — already Japan’s poorest premier on record — gave himself a 30 percent pay cut.

Such is the mood of uncertainty that even lucky workers whose wages and bonuses have defied the national trend are hardly rushing to boost national consumption.

Yasuko Sasamoto works for an import company that has been benefiting from the dramatic rise of the yen against other major currencies over the past three years.

But while Ms Sasamoto’s bonus last year was 1 million yen bigger than in 2010, she is not planning to spend any of it in celebration.

“We have a mortgage on our house, so I’m putting all of the bonus into that,” she says. “It’s a small company and if the yen weakens we could end up with no bonus at all.”

Additional reporting by Ben McLannahan in Tokyo

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