Pro-business policy won’t raise pay

The disappointing result of the annual wage negotiations at Japan’s leading companies concluded last week seems to highlight the limitations of the Abe administration’s drive to prod firms to raise wages, and thereby hopefully boost consumer spending, through unusual government pressures on top corporate executives and its business-friendly policies such as corporate tax cuts.

Trend-setting major automakers and electronics firms cited uncertainty over their global business environment, such as slowing growth in China and other emerging economies, as they kept the raises in their employees’ basic monthly pay scale at roughly half the level offered for their unions a year ago. The stock market turbulence since the beginning of the year, triggered by the global economic uncertainty, and the sudden rebound in the yen’s exchange rate against the dollar appear to have clouded the prospects of the companies, whose profits have been pushed up to record levels aided by the weak yen under Prime Minister Shinzo Abe’s trademark economic policies.

Toyota Motor Corp., the nation’s top automaker, which expects its operating profit in the business year to March to hit a record ¥2.8 trillion, wrapped up the talks with its union with a ¥1,500 average hike in its monthly pay scale — compared with its record ¥4,000 last year. Toyota President Akio Toyoda said the “tide has changed” in the firm’s business environment.

The modest raise at Toyota was reflected in the outcome of the talks at other major automakers Honda and Nissan, as well as electronics giants such as Hitachi, Panasonic and Mitsubishi Electric. That labor unions at the nation’s top three banking groups — Sumitomo Mitsui, Mitsubishi UFJ and Mizuho Financial Group — gave up even demanding pay scale hikes this year out of concern that the negative interest rate policy introduced by the Bank of Japan in January could hurt the banks’ earnings may have impacted sentiments in wage talks in other industries.

It’s not clear how results of the negotiations at these major firms will influence talks at small and medium-size companies, which employ 70 percent of Japan’s labor force, or the working conditions of irregular workers such as part-timers and term-contract employees, many of whom are not represented in annual pay talks even though they account for about 40 percent of Japan’s workers. In what appears to be an encouraging sign, Toyota offered a higher pay-scale raise for its term-contract workers than for its regular employees. Some major firms in service sectors facing manpower shortage offered raises for their part-time and contract workers. Whether such moves will spread broadly across industries remains to be seen.

For the past three years, Abe proclaimed that he would pull Japan out of deflation by enabling sharp wage hikes for company workers. His administration took the unusual initiative of repeatedly urging corporate executives to turn their increased profits into higher pay for their employees. Big companies that enjoy the benefits of Abenomics have complied, and the administration took credit for the sharpest raises in years at the major firms. But the wage hikes at such firms — which accounts for a fraction of corporate Japan — have not yet kick-started what the administration calls the virtuous cycle of the economy in which improved corporate earnings push up wages, boost personal consumption and in turn trigger more business investments.

Even as the major firms offered the most generous pay raises in years in 2014 and 2015, growth in the income of workers across Japan has been slow and outpaced by the rise in prices. Last year, the average monthly wage of workers grew a scant 0.1 percent in nominal terms and fell 0.9 percent in real terms adjusted to inflation. In 2014, nominal wages rose 0.8 percent but pay declined 2.5 percent in real terms.

The wage growth has been hardly strong enough to spur consumer spending, which has remained weak since the April 2014 consumption tax hike. Households continue to keep their purse strings tight despite the slowdown in inflation in recent months because prices of many daily necessities have increased. Average household spending in 2015 dropped 2.7 percent in real terms from the previous year — and also fell 1.7 percent in nominal terms for the first decline in four years. The results of the wage talks at the trend-setting major firms this year seem hardly robust enough to turn the trend around.

It would be easy to blame the big firms for the disappointing wage hikes despite their record-level profits. Many firms remain hesitant toward raises in the basic pay scale of their workers — which entails higher manpower costs over the long term — while they seem more ready to comply with demands for higher bonuses that reflect the better earnings. They may not be doing enough of their share of the hard work to realize the economy’s virtuous cycle. But blame also belongs to the Abe administration, which needs to realize that its pro-business policies, including the cuts to corporate taxes, alone will not spur businesses to spend and invest more.