Corporate cost-cutting is dragging on wages, resulting in weaker consumer demand and a stronger case for monetary easing to counter deflation.
Overall pay fell to ¥243.5 trillion in the second quarter, according to a government report Monday. The figure, which is seasonally adjusted, was only 0.7 percent above the level in the final quarter of 2009, which was the lowest since 1991.
Companies targeting cost reductions span Tokyo Electric Power Co., the operator of the devastated Fukushima No. 1 nuclear plant, and heavy exporters Panasonic Corp. and Sharp Corp.
The risk is a prolonging of the deflation that has plagued the nation since the 1990s, and weakness in consumption that may be exacerbated by the consumption tax hike in April 2014.
“As long as wage deflation continues, there will be no doubt that the Bank of Japan will have to continue monetary easing,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. “There won’t be an end.”
Second-quarter economic growth was revised downward Monday to an annualized 0.7 percent from 1.4 percent, fueling concern that a contraction is possible in the three months ending in September.
Finance Minister Jun Azumi said Tuesday the government will keep monitoring the economy “for a while” before deciding whether any extra policy measures are warranted. In one positive sign, the nation’s largest manufacturers turned optimistic for the first time in four quarters, according to a government index released Tuesday.
Unit labor costs, measured by the difference between growth in compensation for workers and real gross domestic product, fell 3.6 percent in the three months through June from a year earlier, the largest decline since the July-September period in 2010, according to data compiled by Bloomberg.
Goldman Sachs Group Inc. said declines in nominal wages are lengthening the route to an exit from deflation. JPMorgan Securities Japan said this month that softness in incomes may partly explain a weakening in private consumption.
Besides falling prices, the economic backdrop includes declines in exports and industrial output in July, the most recent month for which that data have been released.
“The economy has been losing momentum this quarter, with exports likely to decrease while consumption and capital spending are deteriorating,” Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc., said after Monday’s report. “The chance that the Japanese economy will slip into a contraction in the third quarter is increasing.”
The BOJ may increase its asset-purchase program at a Sept. 18-19 meeting if the U.S Federal Reserve leads the way by easing, said Daiwa Institute of Research.
Sharp and Panasonic are among companies targeting costs. Sharp is cutting 5,000 jobs and may sell off factories after increasing its annual loss forecast to ¥250 billion as lower demand for televisions and a strong yen erode earnings.
Panasonic will probably cut costs by ¥130 billion this fiscal year after reducing them by ¥64 billion in the first quarter from a year earlier, according to Chief Financial Officer Hideaki Kawai.
Some businesses are moving operations overseas to locations where workers are paid less, a shift illustrated by Nissan Motor Co. making cars abroad to sell in Japan.