Japan wages: Manufacturing consent

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Shunto, the annual "spring offensive" by Japan's trade unions, used to strike terror into the hearts of corporate managers. Hundreds of thousands of workers would take to the streets demanding higher wages; at its peak in the 1970s, general strikes paralyzed the country.

After two decades of economic stagnation, shunto became an insipid thing, less an offensive than a doomed skirmish with well-entrenched managers. But not this year. Shunto is back, and the outcome is crucial to the success of Abenomics, and Japan's economy.

Since Prime Minister Shinzo Abe began his stimulus in 2012, Japan's workers have been walloped by a 3 percentage point rise in consumption tax, watched corporate profits soar, and yet enjoyed almost no rise in their pay. Not only are they reluctant to spend more, which is essential to keeping the economy on track, but their faith in the overall policy is wavering.

"Last year's consumption tax hike has raised the price level. If wages don't rise by that much we won't maintain our income," says Shoichi Tsunoda, who represents the workers at Yaskawa Electric, a maker of motors and factory robots based on Japan's southern island of Kyushu.

The company has done well, but workers feel they have not shared enough in the profits, and their expectations are rising. "Compared with last year's Y2,000, we're asking for a Y6,000 rise in basic pay as well as the usual seniority increase," says Mr Tsunoda.

More fundamentally, this year's shunto is a test of whether Abenomics is working, and if wage growth is not higher than last year it will be a worrying sign. But shunto has also become a tool of policy in itself as Mr Abe directly lobbies companies to raise wages.

The credibility of the prime minister is now on the line, and in a speech last week, he showed how much political capital he has invested in this year's pay talks. "Expanding corporate earnings will lead to wage rises," said Mr Abe. "The wage increase trend will continue in spring next year and spring of the following year, and we will spread the warm winds of economic recovery to everyone throughout the country."

Labor shortage

The best news on Japan's economy is coming from the jobs market, where there are signs of labor shortages, and organic pressure for higher wages. But there is also skepticism about how much the government can do to boost pay merely by asking.

"We have doubts about the medium-term sustainability of such government/Bank of Japan-led wage increases and their repercussions on smaller businesses," says Naohiko Baba at Goldman Sachs in Tokyo. "Even if this succeeds for a year or two, there is no guarantee that the government will be able to continue to pressure businesses forever.

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"We expect the 2015 spring wage negotiations to produce wage increases at only a slightly higher rate than in 2014, and we think larger wage hikes sufficient to support the BOJ's expectations for the 2 per cent inflation target are unobtainable."

Mr Abe won power in late 2012 on a pledge to revitalize Japan's economy. After a huge financial bubble burst in 1990, the country became locked into a vicious cycle of slow growth and stagnant or falling prices, leading to a persistent lack of demand, and constant deficit spending by the government to try and keep the economy moving.

The "three arrows" of Abenomics are designed to break that cycle. Arrow one is a massive monetary stimulus by the BoJ, begun in April 2013, and redoubled last October. Arrow two was a fiscal stimulus, which turned into fiscal tightening last spring when the consumption tax went up. Arrow three is structural reforms aimed at boosting long-run growth.

Initially, all went well. The monetary stimulus caused a huge fall in the yen, and combined with public spending at home, the result was above trend growth of 1.6 per cent in 2013. Inflation picked up. But in retrospect, last year's sales tax rise came too soon. Wages were still stagnant, so it hammered consumer spending and pushed the economy into recession.

With little room for more fiscal stimulus, an export sector hollowed out by years of offshoring to China, and inflation heading back towards zero because of the collapse in oil prices, Japan's economy needs a new source of demand. The best hope is consumption — which is why wage rises are crucial.

Haruhiko Kuroda, governor of the BoJ, made his expectation clear in a speech to business leaders in December. "Some labor unions have decided to demand an about 2 per cent increase in base pay for wage negotiations towards spring 2015," he said. "That is a landmark event in that the Bank's price stability target is taken into consideration."

Wages normally rise when an economy is at full employment. With companies competing for their services, workers can demand more pay. It is much less clear, however, if government pressure can persuade business to raise wages when there is no labor shortage.

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"It can have a signalling effect but firms basically decide wage levels in order to maximize long-term profits. Government's ability to influence that is limited," says Hiroshi Shiraishi, senior economist at BNP Paribas in Tokyo.

Yet the government may now be pushing at an open door. Behind the headlines about growth and inflation, Japan's labor market has tightened significantly. The unemployment rate is down to 3.4 per cent, while the ratio of job openings to applicants has risen to 1.15 times, sharply up on a year ago.

Political pressure

Yasutoshi Nishimura, state minister for economic policy, is bullish. "Everyone knows this must happen, they have the will to do it, and the labor market is already tightening," he says. Mr Abe's pressure — from personal lobbying over games of golf to appearances at unlikely industry events such as the Japan Foodservice Association — simply add an extra impetus.

"Overall, I think the trend towards wage rises is extremely strong," says Mr Nishimura, arguing that they will feed through to inflation. "There is no consumption tax rise this year so I expect consumption to come back. Demand will increase, so I think we can expect price rises."

Each company negotiates pay with its own union, so managers are free to resist government pressure. Minoru Usui, president of printer maker Seiko Epson, signaled he was positive about raising base pay this year as the company expects to book a second straight year of record profits. But he said government had nothing to do with it.

"The decision will be made through serious discussions between unions and management, not because there is a request from the government," says Mr Usui. "I don't feel that kind of pressure."

But some managers do feel an obligation, as well as expecting their businesses to benefit if Abenomics succeeds. Yaskawa Electric is the kind of high-tech manufacturer that still prospers in Japan. It has done well out of Abenomics, with operating profits set to double compared with 2011, helped on their way by a weaker yen.

Junji Tsuda, chairman and president of Yaskawa, says that he will raise basic pay. "Given that it's part of a broad national plan to restore inflation, I think we should respond."

As a minister in a conservative, business-friendly government, Mr Nishimura is uncomfortable about getting involved in wage negotiations, but thinks the prize of ending deflation makes it worthwhile. "I think this is quite an exceptional thing. Properly, it should be decided between laborand management," he says. "We have no intention of continuing it forever."

The economic impact of this year's settlement will depend greatly on the form of pay rises, and how far they spread. Only 18 per cent of Japan's workforce is unionized — about 10 million people — and for the army of contract and part-time workers, parallel talks on the minimum wage, due to conclude in July, will make more of a difference.

The effects of the shunto can leak into the broader economy, however, because suppliers at big industrial groups take a lead from their customers. Despite its reputation for brutal cost-cutting, Toyota is dropping demands for lower prices from its mammoth empire of component suppliers. Analysts say the goal is to let wage increases trickle down to the sector as a whole.

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Not all companies are in the same position. "Large manufacturers have had the greatest profit growth but that is where labor conditions are not that tight," says Mr Shiraishi. "There is a mismatch between ability to pay and need to pay."

A senior executive at one of Japan's largest industrial groups says his company is focused on cash generation, and while it might raise bonuses, there is no chance of hikes in basic pay. Meanwhile the troubled electronics company Sharp, has agreed a wage freeze this year as it tries to restructure its core business.

Then there are domestic companies that, like their workers, have felt little direct benefit from Abenomics. "Japanese exporters are already feeling the benefits but for those in other sectors, they need to start believing that they will lose out unless they jump on to the same ship and raise wages," says Takeshi Niinami, president of Suntory Holdings, the Japanese owner of US spirits maker Beam.

Upping the base

One of the biggest decisions is whether to raise basic pay or just lift bonuses and allowances. The Rengo union association is calling for a 2 per cent rise in base pay, as well as increases for seniority. The choice will shape the economic impact of the shunto. Mitsumaru Kumagai, chief economist at the Daiwa Institute of Research, says that basic wage rises have a large multiplier effect on consumption, whereas bonuses tend to be saved.

Last year's shunto produced pay rises of 2.2 per cent, the highest in 13 years, but a chunk of that is just seniority increases. What matters for consumption is an increase in the overall wage bill. The rise in basic pay last year was about 0.4 per cent — far below what is needed to drive consumption on pace with a 2 per cent inflation target.

This year, economists are looking for a little more. Mr Kumagai forecasts a headline increase of 2.5 per cent, implying a base pay rise of about 0.7 per cent; Mr Shiraishi is going for a 0.8 per cent increase in base pay. That would be enough for Mr Abe to argue that his stimulus is still on course — but not enough to hit Mr Kuroda's 2 per cent inflation target.

Yaskawa's Mr Tsuda dates the problem to the end of the era of rapid growth when manufacturers focused on battling low-cost rivals in Korea and China.

"We became a society where wages go down," he says, and if that continues, "there's a danger the whole society could fall apart". To take a different path requires inflation, he adds — and that means higher wages.

Cradle to grave: Salary system distorts employment picture

Japan's employment practices — including jobs for life, company-level unions and strict seniority wages — both help and hinder attempts to boost the economy via pay rises. They also make some of its wage statistics highly misleading.

Many Japanese workers still join their company straight from university, start on a modest base salary, and then enjoy an annual seniority pay rise every year until they reach their 60s. These are the salarymen of legend.

Company-level wage negotiations, guided by national talks between business and unions, give the government a vehicle to push for pay increases. But the seniority system dictates how those rises are handed out. A company may tout a 2 per cent increase in pay, and the average shunto wage deal has been around this level for the past decade or so, but most of it is actually the increment for an extra year of seniority.

Since the oldest workers retire, while new graduates arrive at a flat base salary, "pay rises" of this sort may not increase the company's wage bill at all.

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That explains the demands for a "base up" in salaries, meaning a rise at every point in the company's salary scale, which translates directly into an increase in overall wage costs.

Seniority pay rises also mean that every worker in the company gets the same, regardless of merit, or where they are in life. That dilutes the economic impact of wage rises, because the better-paid workers in their fifties are more likely to save, rather than spend, any increase.

Many company executives are resisting union demands for an across-the-board increase. At drinks company Suntory Holdings, president Takeshi Niinami says he is looking at a headline increase of 2 per cent this year but wants to distribute more to younger employees raising children.

Others see the push for wage increases as an opportunity for reform, paying more to valuable specialists, and breaking down the rigid seniority system.

"There's no need to radically increase wages. Consumers will start spending if the management can signal that wages will rise every year, little by little," Mr Niinami says. "The key is a sustainable growth in wages."