Pay cuts not pink slips help ease recession

by Jason Clenfield

Bloomberg

Toshio Taniguchi is one of about 10,000 workers at Tokyo-based Renesas Technology Corp. who accepted a pay cut last month to keep the company alive.

“It was tough to swallow,” said Taniguchi, a 62 year-old worker at the company, Japan’s biggest unlisted chip maker. “But most people are just thankful they still have jobs.”

Japan, the country with the most flexible wage system in the developed world, is slashing pay rather than sacking people, easing the pain of what may be the country’s worst recession since World War II. A long-standing tradition of lifetime employment gives companies such as Toyota Motor Corp. and Renesas little choice, even if millions of workers like Taniguchi have to make do with less.

“Many people are spared a tragic outcome, even if there’s a downside for everybody,” said Robert Feldman, head of Japan economic research at Morgan Stanley in Tokyo. “It helps remove the fear factor.”

Not all of Japan’s workers are equally protected. In addition to paring wages for full-timers, companies are cutting temporary staff, a group that makes up more than a third of the country’s 56 million-strong workforce. Before the economic bubble burst in the early 1990s, only 20 percent of workers were temporary.

Still, record declines in factory production have yet to trigger job losses of the scale seen in the United States, where the unemployment rate jumped to 8.5 percent in March from 6.6 percent in October. Japan’s jobless rate is 4.4 percent. About 460,000 Japanese workers have lost their jobs since October, compared with 3.3 million in the U.S.

Companies are keeping people even as the volume of work falls. Production lines at the Renesas wafer-processing plants in Gunma Prefecture and Shikoku region are running at less than half-capacity.

“People spend a lot of time cleaning these days,” said Taniguchi, laughing at the lengths people go to in order to stay busy. “We’re cleaning the undersides of desks. We’re cleaning behind the books on shelves. These are huge factories, so there’s no end to the stuff you can find to clean.”

Renesas forecasts a record loss of ¥206 billion in the year that ended on March 31 and, according to media reports, may be married off to NEC Electronics Corp. by parents Hitachi Ltd. and Mitsubishi Electric Corp. Rank-and-file employees will see wage cuts of 10 percent this year; executive pay will drop by 30 percent.

“The company’s survival is at stake,” said Hirotaka Ohno, a spokesman at the chip maker. “There are no jobs unless you keep the company alive,” he said, adding that no one has been fired, though 600 employees have taken early retirement.

What makes Japan different is the flexibility of its wage system, according to Randall Jones, head of the Japan desk at the Organization for Economic Cooperation and Development in Paris. With the exception of Japan, average nominal pay in 25 advanced economies has risen virtually every year for almost two decades — even during recessions, OECD data show. By contrast, Japanese salaries have fallen in seven of the last 10 years.

“Rather than cut workers, they cut wages. In a sense, it’s healthy,” Jones said. “Keeping people on the job is better for the economy than having lots of people go onto unemployment or welfare. There’s a lower burden on society.”

Full-time workers typically get about a quarter of their yearly wages in two lump payments set at the start of each business year. The so-called bonuses give companies room to adjust labor costs when profits fall.

Summer payments will plummet an average of 7.3 percent this year, according to an estimate last week by Tokyo’s Dai-ichi Life Research Institute. The drop would be the biggest since comparable data became available in 1991; employees at manufacturers will probably suffer the biggest cuts, said economist Taisuke Nakamoto.

For workers further down in the pyramid of Japan’s suppliers, pay cuts are pushing some into poverty.

“It’s hard to make ends meet,” said Takashi Takai, a 46-year-old factory worker at a Kyoto-based company that processes metal used in auto parts. Takai said his pay has been cut by a third to ¥190,000 a month. “I should probably start looking for a second job, but there’s nothing out there.”

Toyota’s factory workers took a 15 percent pay cut this year. The automaker, which forecasts a ¥450 billion loss in the year that ended on March 31, has so far managed to maintain its full-time, domestic workforce of 69,500. Job cuts have been confined to about 3,000 temporary workers, whose contracts the company allowed to run out.

“Management came to us and said, ‘we want to protect employment, but wages and bonuses have to be on the table,’ ” said Nobuyuki Nakamaru, 39, a spokesman for the Toyota Motor Workers Union. “There were people who didn’t like the outcome, but both sides were committed to keeping jobs.”