Japan’s “Spring Offensive” by Kenichi Amaki, Matthews Asia

The annual “spring offensive” or in Japanese “Shunto” is currently underway in Japan. The terms refer to the annual wage negotiations that occur in March and April between labor unions and employers. In an effort to revitalize the economy, Prime Minister Shinzo Abe has been pushing the private sector to raise worker pay and try to boost consumer spending. However, media headlines have expressed much disappointment over a slowdown in wage growth and the so-called “failure of Abenomics.” But to get a true picture of Japan’s wage situation, it is important to look at growth in both base wages and bonus payments. Though base wage increases may be slowing from last year, the outlook for bonus payments is more positive.

Overall, base wage increases in Japan will likely be lower than last year, reflecting economic uncertainty surrounding the recent strength in the yen and a slowdown in its largest trading partners, namely China. On the other hand, bonus payments may be larger thanks to record corporate profits. Media attention seems to be fixated on the base wage hike at Japan’s leading manufacturers, particularly in the automotive and electronics sectors, as they set the trend for wage negotiations in the broad manufacturing sectors. So far, base wage increases have been lower than last year, so the media has been on its “Abenomics failure” frenzy. However, they ignore the fact that workers at some of those companies are getting large bonus checks that will increase their total compensation more than last year when base wage gains were higher.

Additionally, wage pressures are now stronger at small and medium-sized enterprises (SMEs) rather than larger corporations. The Japan Council of Metalworkers’ Union (JCM), which includes automotive and electronics sectors, reports that base wage gains were higher for companies with less than 300 employees than for larger corporations. This is important as SMEs provide the bulk of employment in Japan.

Even more importantly for Japan, however, is what happens at the lower end of the wage curve where we believe, wages are too low. The national average minimum wage was increased by 2.3% as of October 2015 (previous year was 2.1%). Abe is working to boost wages at the lower end, including plans to raise the minimum wage by 3% per year until it reaches 1,000 yen per hour (it will take eight years from the current 798 yen per hour) and an “equal work equal pay” rule where employers cannot discriminate pay between full-time and temporary and part-time workers if they are doing the same work. More than 30% of Japan’s workers are temporary or part-time, and are paid much less than full-time workers. Lower-income workers have a higher propensity to spend; therefore, wage increases at the lower end will have a more significant impact on consumption and hence the economy overall.

The other glaring reality is that labor is in short supply in Japan as the population declines. In 2015, Japan created more full-time than temporary or part-time jobs for the first time in 21 years. Almost 90% of those full-time positions were filled by women. Japan’s unemployment rate is 3.3%, while the job offers-to-applicant ratio is 1.28, the highest level since 1992. Regardless of what the government may or may not do, we believe there is a structural upward bias on wages in Japan.

What does this mean for consumption and the Japanese economy as a whole? This is the tricky part. As Japan’s population is declining, there is a structural downward bias on consumption and GDP. Higher female labor participation and rising wages may offset the population decline but to what degree is uncertain. For now, we remain cautious on consumption in Japan as inflation in daily goods prices has made consumer spending habits more defensive. I hope Abe will cancel the planned consumption tax increase planned for April 2017. Nobel Laureates Joseph Stiglitz and Paul Krugman were both recently in Japan where they argued that raising the consumption tax would be detrimental for the economy. We believe Abe has his mind set on postponing the tax hike and this is just a ritual to convince the Ministry of Finance. Of course, cancelling the tax hike alone won’t lift the economy. Further wage increases are needed in Japan to convince the perennially conservative Japanese household to spend. Hopefully, younger Japanese will wake up to the fact that they are increasingly becoming a “rare” resource and actually have the upper hand in terms of wages.

Kenichi Amaki
Portfolio Manager
Matthews Asia

Scott Bessent Abenomics Japan

Japan’s “Spring Offensive”