Japan unlikely to pay its way out of fix

The prime minister of Japan's calls for companies to raise salaries have, for the most part, fallen on deaf ears.

Story highlights

  • Japan's prime minister has called for companies to raise salaries in order to boost spending
  • Resistance from businesses due to lack of price and revenue rises
  • Without salary increases, policies aimed at stoking inflation could end up hurting consumers

Within weeks of taking office as Japan's prime minister last December, Shinzo Abe made an unusual plea to companies: raise salaries. Executives were not doing so because prices -- and thus revenues -- were not going up. But one of the main reasons prices were not rising was that incomes were not going up. If Japan was ever to get out of its deflationary spiral, someone needed to do something extraordinary.

Takeshi Niinami answered Mr Abe's call. Profits had been growing steadily for years at Lawson Inc and were expected to increase again this fiscal year. As such, the president of the country's second-largest chain of convenience stores -- and one of a group of business leaders advising Mr Abe on ways to restore Japan's competitiveness -- felt he had a duty to "set an example".

This month Mr Niinami introduced 3 per cent average annual pay rises for about 3,300 full-time employees aged between 20 and 49. This was the first across-the-board increase under his leadership, which began in 2005. He says he expects to do the same next year.

"These people have lots of appetite to consume, but can't," he says. "They are the 'working poor', often living with parents when single, accustomed to living on very tight budgets."

Mr Abe's big idea is that more companies should emulate Lawson so that Japan begins to generate expectations of steady growth in incomes. If not, policies aimed at stoking inflation under the mantra of "Abenomics" could end up hurting consumers by reducing their purchasing power.

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However, on the evidence of this year's round of wage negotiations between management and labour unions, completed last week, Japan Inc is not yet ready to take that step. While some of Lawson's direct peers have responded -- Seven & I Holdings, the number one convenience-store chain, says it will increase base pay for more than 50,000 employees -- many other companies are still lifting bonuses rather than base salaries.

Such one-off gains tend to have a "limited" impact on consumer spending in the world's third-largest economy, says Naoki Iizuka, economist at Citigroup in Tokyo.

Companies admit that the fall in the yen sparked by Mr Abe's talk of aggressive monetary easing has improved the outlook for profits. But it was only six months ago, with the yen near its record nominal high of 75 to the US dollar, that many were posting losses on their domestic operations.

Keidanren, Japan's largest and most powerful business lobby, set out its stall for the spring pay round in December, arguing that deflation and a still-strong currency meant that employers had "no room" to pay people more.

It will take time for companies to feel comfortable about raising fixed costs, says Hiroyuki Takahashi, director of the labour policy bureau at Keidanren. "To increase monthly wages, we need to see a longer-term improvement in corporate profits. There is no certainty that the current exchange rate will continue."

That caution was reflected in workers' demands. In the car industry, for example, 10 of the 12 biggest companies awarded the bonuses unions were asking for, which was the best result for eight years, says Hidenari Hori, assistant general secretary of the Confederation of Japan Automobile Workers' Unions (JAW).

But none of those 12 was seeking rises in base salaries over and above regular seniority-based increases. Overall, 51 per cent of the 1,108 unions represented by JAW sought higher base pay -- little changed on the 43 per cent who asked for a higher base last year. Most of those were smaller companies trying to narrow the pay gap between themselves and the likes of Toyota.

Mr Abe's aims are admirable, says Mr Hori. "Trying to terminate deflation, to revive the Japanese economy, is a good thing. But as a labour union, we have to be responsible and to do our best for the development of the auto industry. The yen has fallen, but it is still high. Companies are still shifting production overseas in search of lower costs."

Some companies in other industries are finding ways to heed Mr Abe's call. Koshidaka Holdings, an operator of fitness clubs and karaoke booths, has pledged to add Y5,000 each month to the pay of permanent staff who don't smoke. Nitori Holdings of Hokkaido, a furniture retailer, is extending pay-rises to part-time employees, consistent with the company philosophy of "enriching everyone's livelihoods," says spokesman Ken Egawa.

But judging by an FT mini-poll of workers viewing cherry blossom in Tokyo's Hibiya Park on a balmy spring day on Thursday, pay-rises implemented by a small band of profitable companies will not be enough to reverse the broad wage declines seen over the past 10 years.

"I don't believe salaries will go up," said a 35 year-old employee of a government-linked insurance company, who did not want to be named. "This year my pay will actually go down by 7 per cent. If inflation does start rising, it's going to be really tough."