Commentary / Japan

Gap between economic data and sense of recovery

by Masaharu Takenaka

The economic recovery since 2013 has increased employment for both regular and irregular workers, brought record profits to businesses and more than doubled share prices. But compared with these changes, wage trends are not that promising. Perhaps because of that, 60 to 80 percent of respondents in various surveys reply “no” when asked whether they share the sense that the economy is recovering.

What then is the long-term trend of average wages? It is deplorable that the labor ministry’s inappropriate handling of wage statistics, which surfaced earlier this year, has spoiled the long-term consistency in wage data. But there are other sets of wage data, compiled by the National Tax Administration Agency. In fact, the tax agency data is even more reliable because they are based on records of withholding income tax on individuals’ wage income. The disadvantage is that they show only the annual data, and since it takes time to tally them and make them public, the latest statistics currently available are the ones from 2017.

The movement of average wages since 1980 — both nominal and real (with the latter adjusted by consumer prices in the base year of 1980) — shows that nominal wages increased rapidly until the beginning of the 1990s, after which growth lost speed. Although their growth dipped into the negative territory in the 2000s, they returned to a trend of moderate increase in 2013.

To get the real picture of income changes, however, one needs look at inflation-adjusted real wages. Past data show that fluctuation in real wages tend to be narrower than that of nominal wages. Between 1980 and 1990, the average annual growth in real wages was 1.16 percent. Real wages declined by 0.28 percent a year on average from 1991 to 2012, but started picking up again in 2013 — rising an average of 0.55 percent annually from 2013 to 2017.

Even during the 1980s, when it was still widely believed that wages would keep rising, the average annual increase in real wages was only 0.61 percentage points higher than today. In an average model household in the 1980s, only the husband had a job and the wife was a full-time homemaker. Today, a dual-income household is much more common. In terms of salary income, a dual-income couple should be able to become much wealthier than if the whole family depended on the income of the husband alone. Still, a majority of people reply to surveys that they do not feel the benefits of an economic recovery. Why? There are several factors that may explain.

The first is money illusion, which is often cited in economics. While it is appropriate to use real wages to assess the real income picture, people generally feel how the economy is performing through nominal income. In the 1980s, when the nation had higher inflation, nominal wages increased at an annual average of 3.9 percent. However, average nominal wage growth was 1.2 percent a year over the period from 2013-2017 — less than a third of the rise in the 1980s. That is making it harder for people to feel that their salary income is indeed growing.

Second, humans have an asymmetrical sense over loss and gain, as indicated by experiments in behavioral economics. A decline in income causes a strong unpleasant feeling among people, but an increase in income — even of the same margin — causes a relatively small level of satisfaction.

The third factor is the difference in the degree of growth in household assets. An increase in assets depends on accumulation of savings and the rise in asset prices. Until the 1980s, prices of both stocks and real estate were rising constantly. But the asset bubble collapsed at the beginning of the 1990s, and the upward trend has since continued to be weak. The slowdown in income growth and the deceleration of growth in asset prices combined have led to the sluggish increase in household assets.

For example, the Bank of Japan’s flow-of-funds data shows that total household assets (excluding real estate) grew 2.9 times from ¥312 trillion at the beginning of the 1980s to ¥893 trillion at the end of 1989. Household assets continued to grow, but their growth slowed down to 1.4 times over the 1990s. While the outstanding household assets at the end of 2018 reached ¥1,830 trillion, they increased by a mere 1.22 times over the past decade.

The fourth factor is the relative changes that have taken place between Japan and the emerging economies in its neighborhood, especially China, where the growth in people’s income levels far outpaced Japan’s since the 1990s.

During the late 1980s to the early 1990s, steep appreciation of the yen also helped Japanese traveling to emerging economies to strongly feel their own affluence. Such a sense has faded, and Japanese travelers to some of these countries may feel the opposite. Since many of these emerging economies are now in the same catch-up phase of their development — just like Japan during its rapid postwar growth — their income levels tend to rise rapidly.

How about Japan’s economic growth rate since the 1980s as compared with other major advanced economies? The average annual real-term growth in per-capita GDP of nine major developed economies over the period from 1980 to 2018 was as follows (in descending order): 1.8 percent in Britain and Spain, 1.7 percent in the United States and Japan, 1.5 percent in Germany and Australia, 1.3 percent in France and Canada and 0.9 percent in Italy. The average among these nine countries was 1.5 percent (IMF World Economic Database April 2019).

As these figures show, the per capita GDP growth in real terms over the long term is in fact not much different among the advanced economies. Of course, the average annual growth in Japan was higher during the 1980s (at 3.9 percent) and lost speed since the 1990s. But over the period from 2010 to 2018, Japan’s average annual growth was 1.5 percent — on a par with that of the U.S. and surpassing the nine-country average of 1.1 percent. In short, Japan is performing above average major industrialized economies, instead of falling behind others.

To sum it up, economic data doesn’t give much grounds for pessimism about Japan’s economy. The Japanese people’s tendency to still lean toward pessimism over the state of the economy may be attributable to their cultural traits.

Masaharu Takenaka is a professor of economics at Ryukoku University in Kyoto.