Japan’s economy only has more troubles to show

Translating almost literally as “spring wage offensive”, Shunto marks the annual Japanese ritual of wage bargaining between business groups and labour unions.

This year’s negotiations had been seen as one of the most anticipated economic events in the country’s recent history and preceded by months of feverish lobbying from the prime minister, Shinzo Abe, who had urged business groups to help smash Japan’s deflationary mindset once and for all. His calls have been echoed by some of the world’s most renowned economists. Olivier Blanchard, the former chief economist at the International Monetary Fund, and Adam Posen, a former Bank of England policymaker, called for a radical 10 per cent increase in nominal wages this year.

Boosting the wages of Japanese workers has become the latest lightning rod in the country’s two-decade struggle to ensure long-term economic prosperity. Higher salaries encourage greater consumption and are vital in raising inflation. This in turn would help erode some part of Japan’s record 250 per cent of GDP debt pile.

However, average base wages for Japanese workers have risen only 1 per cent over the last two years. “What is needed is a jump-start to a wage-price spiral of the sort feared from the 1970s,” say Posen and Blanchard, who have called for a “virtuous cycle” of wage growth, inflation and lower debt to release Japan from economic stagnancy.

But, like so many of Tokyo’s radical attempts to extricate itself from low growth and low inflation, the early signs show that Shunto has already fallen flat. For all the intense political and international pressure to engineer higher basic salaries for Japan’s 63.5 million workers, the early results have been disappointing.

Corporate giant Toyota is reported to have agreed on a wage settlement which will boost its employees’ basic wages by just 1,500 yen a month. Overall, the fruits of this year’s Shunto are set to be more meagre than those of 2015.

The round of talks indicate that wages rise demands from unions are around 3.27 per cent, lower than the 3.74 per cent of 2015, according to analysts at UBS. This indicates the average eventual wage hike will be around 0.3 per cent in 2016, down from 0.69 per cent agreed in 2015, economists at JP Morgan calculate.

It is a reluctance to raise wages that puzzles economists. Nearly four years on from the start of the government’s Abenomics programme, Japanese companies are sitting on record cash piles equivalent to nearly 50 per cent of the country’s entire GDP. Toyota recorded a bumper net profit of 2.17 trillion yen last year.

Other export-oriented sectors have benefited from a cheaper currency while record low interest rates and monetary stimulus have helped to ease financial conditions for over three years. Labour market indicators are also showing encouraging signs. Unemployment has fallen to just 3.2 per cent, its lowest level since 1997.

The ratio of available jobs to applicants also points to further declines in joblessness to come. More and more women and elderly Japanese have also entered the workforce to plug labour shortages. And yet wage inflation remains the elusive “missing ingredient” in Japan’s nascent revival.

“If the Abe administration were able to achieve this, it would help enormously in combating the economic malaise that has dogged the country for much of the past two decades”, note economists at Fathom. Others highlight Abenomics’ feted “arrow” of central bank stimulus as overshooting to such an extent that it is now actively hindering wage growth and denting business confidence.

Specifically, the Bank of Japan’s landmark decision to enter negative interest rate territory at the start of January has ushered in a new wave of panic rather than comfort over the power of central banks to stimulate moribund economies. Negative interest rates have sparked global concerns over the profitability of commercial banks and led to stock price falls across the developed world.

Japan’s foray into sub-zero rates — intended to help weaken the currency — has also seen the yen unexpectedly strengthen by 7 per cent against the dollar. This appreciation places a further constraint on wage largesse. Having decided to carry out the most radical experiment in monetary stimulus in modern history by buying up 80 trillion yen in government debt a year, there is now increasing disquiet within the ranks of the Japanese central bank at its next moves.

The initial decision to plunge into negative rates territory caused a five-four voting split among the BoJ’s nine members in January. Following the onset of market panic, two members of the policy board voted to change the interest rate structure to provide greater protection for commercial lenders.

Haruhiko Kuroda, director of the BoJ, has admitted that the computer systems of some market participants have suffered from technical problems as a result of the negative-rate transactions. In their three-pronged assault on stagnation, policymakers have only succeeded in generating “cognitive dissonance”, says Duncan Wooldridge at UBS.

For Fathom, Abenomics is now caught in a unique bind and at risk of becoming a “busted flush”.

— The Telegraph Group Limited, London 2016.