Low wages hindering recovery

The Bank of Japan on July 11 announced that the Japanese economy is “starting to recover moderately” especially on the strength of increased profits of major companies and improvement of capital investment.

This is the first time since January 2011 that the BOJ has used the word “recovery” in its economic assessment, which the central bank upgraded for the seventh consecutive month.

But one cannot help getting the impression that BOJ Gov. Haruhiko Kuroda, who is pushing an economic stimulation policy in close cooperation with the administration of Prime Minister Shinzo Abe, is giving a positive assessment of the economy out of political consideration to help the Abe Cabinet.

If the current economic structure — characterized by workers getting just a small piece of the economic pie — remains unchanged, the economic fortunes of most people will not improve even if various economic indicators point to economic recovery.

Despite the BOJ’s massive monetary easing aimed at buoying the economy, small and medium-size businesses and local economies are not reaping economic benefits.

Increased prices for food items, gas and electricity brought about by the government and BOJ’s cheap yen policy are hurting households, and the increase in the consumption tax rate from 5 percent to 8 percent, scheduled to take place in April 2014, will cause consumers to tighten their purse strings, hindering the economic recovery. Consumer spending accounts for about 60 percent of Japan’s gross domestic product.

Export-oriented businesses are benefiting from the cheap yen. But the BOJ’s recovery scenario seems to be too optimistic. Japanese exports are likely to suffer from a delay in the economic recovery of Europe. The Chinese economy’s slowdown is taking a toll on Japan’s imports and exports with its largest trade partner. Crude oil prices have topped $100 per barrel due to political confusion in the Middle East.

The BOJ should realize that high crude oil prices coupled with the cheap yen will cause problems for the Japanese economy.

The government and the BOJ should pay attention to the fact that while business profits have nearly doubled in the past decade, wages have been decreasing.

It is estimated that the total amount of internal reserves of major businesses tops ¥200 trillion, yet wages are kept low. This means that the foundation of domestic demand has weakened, crippling its power to buoy the economy. This summer many big businesses raised summer bonuses for their employees. But unless regular wages for workers are increased, a sustained expansion of consumer spending is unlikely.

Increased labor productivity brought about by restructuring and improvement of technical strength should translate into higher wages. The BOJ and the government should realize that as long as the relative share of wages in the economic pie is low, strong consumer spending and a strong economic recovery are unlikely.