Business / Economy

Stingy pay raises pull the handbrake on Japan's inflation drive

by Yoshiaki Nohara


As the world puts the worst of the disinflationary threat behind it, tepid wage growth is shaping up as a key restraint to a genuine reflationary era taking hold in some economies. Nowhere is this more so than Japan.

Unlike the U.S. and Germany, where higher prices are driving up salary expectations, there is little pressure for pay hikes in Japan. The risk is that nascent inflation — forecast to emerge this year on the back of resurgent oil prices and a weak yen — erodes households’ purchasing power and crimps consumer spending.

Instead of a “virtuous cycle” in which rising wages boost spending, in turn spurring price gains that encourage more production and investment, consumers tighten their purse strings, undermining demand.

“Inflation works against households, whether it’s in Europe, the U.S. or Japan, but the negative impact is bigger here because pay hikes are harder to get,” said Masamichi Adachi, senior economist at JPMorgan Securities Japan. He sees “a good chance” that wages weigh down inflation in the world’s third-largest economy.

Spain and Australia are among other economies where workers may see higher prices hit their wallets before their paychecks catch up. Unemployment in Spain that’s close to 19 percent means more vacancies must be filled before pressure mounts on salaries. In Australia, a jobless rate of just under 6 percent needs to come down further before it stokes stronger wage gains, according to Gareth Aird, a Sydney-based senior economist at Commonwealth Bank of Australia.

Japan’s labor market is surprisingly tight, with the reported unemployment rate just a fraction over 3 percent. Key stumbling blocks here are unions and employees who’ve put job security above pay hikes, low productivity in areas of strong demand for workers, and a growing number of people in contract and part-time roles that leave them with little bargaining power.

On top of all this, wage negotiations in Japan tend to be guided more by past changes in consumer prices than the central bank’s 2 percent inflation target or its latest forecast for CPI to hit 1.5 percent in the fiscal year starting in April.

Japanese CPI data for December will be released on Friday, with economists expecting a 0.3 percent drop in the core gauge from a year earlier. In Spain, core prices rose 1 percent in December versus 12 months earlier, while Australia’s core index showed a 1.6 percent gain in the fourth quarter, on a year-on-year basis.

Rikio Kozu, president of the Japanese Trade Union Confederation, the nation’s peak body for organized labor, said it’s premature to negotiate pay based on price expectations.

His group, known as Rengo, went into last year’s shunto (annual wage talks) with employers seeking an increase of about 2 percent in monthly base wages and came back with a 0.44 percent bump. There’s no change in the negotiating position for 2017.

The Federation of All Toyota Workers’ Unions is chasing a monthly raise of at least ¥3,000 ($26), also unchanged from 2016, when it secured about ¥994.

Average monthly wages in Japan, adjusted for inflation, fell for the fourth straight year in 2015. Labor ministry data through November points to an increase of less than 1 percent last year.

JPMorgan’s Adachi said Rengo may end up settling for a rise of as little as 0.3 to 0.4 percent in monthly base wages for 2017.

Yasutoshi Nagai, chief economist at Daiwa Securities Co. in Tokyo, projects a 0.2 percent bump.

“There’s no virtuous cycle in the economy,” Nagai said.

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