Finance Minister Taro Aso may have had a point when he denounced as “misers” those companies that pile up profits without reinvesting them or raising wages. The remark he made at a new year greeting with members of the life insurance business association referred to internal reserves that companies set aside from their earnings, which have accumulated to a combined ¥328 trillion across Japan Inc. Aso’s characteristically blunt words may reflect the Abe administration’s sensitivity toward criticism that the benefits of “Abenomics” have not gone much beyond big businesses and the wealthy, leaving smaller firms outside of large metropolitan areas, and consumers, largely excluded.
That remains the biggest challenge for the administration as its trademark economic policy enters its third year. While the nation’s global firms enjoy record profits, consumers have suffered a net decline in their income as prices have risen faster than wages.
While the 40-percent fall in the yen’s value against the dollar under the Bank of Japan’s massive monetary easing boosted the earnings of major firms, the weak currency has hurt other businesses and consumers by pushing up the cost of imports. The sustained slump in consumer spending since the consumption tax hike in April brought down the economy for two consecutive quarters through September.
Prime Minister Shinzo Abe, on the campaign trail for the Lower House election last month, emphasized that a virtuous economic cycle in which improved corporate earnings create more jobs, increase wages and expand consumption “is beginning to emerge.” His job now is to make that happen by ensuring that the benefits of his policies permeate broader segments of the economy.
Speaking at the new year gathering of major business organizations, Abe urged companies that benefit from the planned corporate tax cuts to increase wages for their employees. The tax-reform package compiled by his ruling alliance featured a minimum 3.29-percentage-point cut in the corporate tax rate over two years beginning in fiscal 2015.
“I will continue to aim for further cuts” in the corporate tax, and whether that happens “will depend on you,” the prime minister told the business leaders.
For two years in a row, his administration prepared a gift of tax cuts for businesses as it put unusual pressure on profit-making companies to translate their earnings into higher wages. Last year, major firms offered an average 2.2 percent pay raise for their workers — the sharpest in 15 years. Keidanren (Japan Business Federation) chief Sadayuki Sakakibara is urging member firms to respond to the tax cuts with wage hikes that will at least match the 2014 levels.
Stock market turbulence in the initial trading days of 2015, however, reflects growing concerns over the course of the global economy as crude oil prices fall sharply and political uncertainties in Greece rekindle economic fears for the eurozone.
The falling price of oil is helping to offset the negative impact of the weak yen. Some estimates show that it could bring trillions of yen in benefits to Japan’s economy. On the other hand, deceleration in global growth will dampen demand for Japanese products overseas, impacting corporate earnings.
The ability to raise wages will differ between companies and sectors. The government may increase pressure or offer incentives for firms to offer pay raises or make new investments, but it should be corporate management that makes such decisions. Businesses that can afford it should do their part in moving the economy forward by investing more in manpower.
They should also try to enable their contractors and subcontractors — often smaller companies in weaker positions that find it difficult to pass on increased costs by raising prices or to increase wages — to share the benefits of improved earnings by offering them higher rates for their products and services. Government policies alone will not do the job.