## Japan: Time to Load a Fourth Arrow—Wage Increases

_IMF Blog, March 13, 2016_

## Source details

**Canonical URL:** [Japan: Time to Load a Fourth Arrow—Wage Increases](https://www.imf.org/en/blogs/articles/2016/03/13/japan-time-to-load-a-fourth-arrow-wage-increases)

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## Bibliographic details
- Authors: Luc Everaert, Giovanni Ganelli
- Published: March 13, 2016

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### Overview
- 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.

### Structural causes limiting wage growth
- 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.

### Recent outcomes under Abenomics and labor market indicators
- 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.

### Limitations of recent measures
- 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.

### Policy recommendations — loading a “fourth arrow”
- 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.

### Expected effects and coordination
- 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*

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## Content in this bundle

- **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)](/external/japanese/np/blog/2016/031416j.pdf.md){rel="alternate" type="text/markdown"}
  - [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)](/external/japanese/np/blog/2016/031416j.pdf){rel="external" type="application/pdf"}

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## References

- [definite escape from deflation](https://blogs.imf.org/2014/03/20/abenomics-time-for-a-push-from-higher-wages/)
- [Our analytical work](http://www.imf.org/external/pubs/cat/longres.aspx?sk=43693.0)

_Source: https://www.imf.org/en/blogs/articles/2016/03/13/japan-time-to-load-a-fourth-arrow-wage-increases_