Japan: Time to Load a Fourth Arrow—Wage Increases

IMF Blog, March 13, 2016

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Full-time wages have increased by a mere 0.3 percent since 1995.
Despite record profits, Toyota increased its base salary only by 1.1 percent last year.
The average of 219 Keidanren firms managed just 0.44 percent.
Japan experienced falling nominal GDP through much of the deflationary period while public debt rose to nearly two and a half times the country’s GDP.

Life-time contracts: most workers are employed under life-time contracts and hardly move jobs between companies, which dampens wage demands even when labor markets tighten.
Dual labor market: 37 percent of workers are employed under non-regular contracts, a much higher share than in comparable economies.
Offshoring and hiring patterns: after the sharp appreciation of the yen in the 1980s, companies moved production offshore and hired nearly exclusively under much lower paid non-regular wage contracts.
Decline in unionization and bargaining power: unionization declined and wage bargaining power of labor unions all but disappeared.
Result: tight labor markets do not translate into higher wages.

Abenomics combined monetary easing, flexible fiscal policy, and structural reforms; the monetary arrow was launched in force in 2013, depreciating the yen and boosting corporate profits.
Nominal GDP has risen by 3.7 percent over the past two years.
Tax revenues, especially from corporate profits, have increased.
Labor market tightened and participation reached a historic high; by end 2015, only 3.3 percent of people looking for jobs were unemployed.
Some sectors face acute labor shortages.
Current wage negotiations are weak: overall wage demands are likely to lead to an increase of only about 0.5 percent, well below the Bank of Japan’s inflation target.
The lagging of real wages to labor productivity appears to continue a long standing trend affecting Japan more than other similar economies.
Example scenario: if inflation was at two percent and productivity grew by one percent, then increases in wages and social security benefits by 3 percent would leave everyone equally well off.

Recent minimum wage increases affect directly only about one tenth of the work force.
Moral suasion by authorities is unlikely to be sufficient for broader wage increases.
Corporations remain reluctant to boost wages or prices given global and domestic weakness.

Introduce a “comply or explain” mechanism for profitable companies to ensure that they raise wages by at least 2 percent plus productivity growth.
Strengthen existing tax incentives to raise wages.
Consider introducing tax penalties for companies not passing on excessive profit growth.
Set the example by raising public sector wages in a forward looking manner.
Deepen the third arrow: cut much deeper through labor market duality by ensuring that new hiring takes place on contracts that strike a middle ground between life-time and non-regular contracts to restore wage bargaining power.

Coordinated wage and price inflation anchored by forward-looking inflation expectations would reduce real interest rates and make monetary policy more effective.
“Base-up” wage increases should become a central part of the strategy to end entrenched deflationary expectations.

Luc Everaert, Giovanni Ganelli — March 13, 2016

日本：第4の矢を放つ準備を－賃金上昇; ルーク・エバアート、ジョバンニ・ガネリ, iMFdirect ブログ2016年3月14日掲載
- 日本：第4の矢を放つ準備を－賃金上昇; ルーク・エバアート、ジョバンニ・ガネリ, iMFdirect ブログ2016年3月14日掲載 (Markdown version)
- 日本：第4の矢を放つ準備を－賃金上昇; ルーク・エバアート、ジョバンニ・ガネリ, iMFdirect ブログ2016年3月14日掲載 (PDF)