Sunday, October 26, 2014

Japan’s Coming “Wage Surprise”

TOKYO – The year 2013 saw the Japanese economy turn the corner on two decades of stagnation. And the future will become even brighter with the appearance of what we are calling the “wage surprise.”

Intensive discussions since September among Japanese government, business, and labor leaders have been geared toward setting in motion an upward, virtuous cycle whereby increased wages lead to more robust growth. I have taken part in two of the four meetings so far, joining our finance minister, economy minister, and labor minister, as well as industry and labor leaders like Akio Toyoda, the head of Toyota Motors, and Nobuaki Koga, who leads the Japanese Trade Union Confederation. Each time, I have come away from the meeting feeling confident and invigorated.

Let’s face it. Deflationary pressure in Japan – and only in Japan – has persisted for well over a decade. At the beginning of my premiership, I launched what observers have called “Abenomics,” because only in my country had the nominal wage level remained in negative territory for a staggering length of time.

I was appalled when I first saw the statistics: Japan’s wage level since 2000 has fallen at an average annual rate of 0.8%, compared to average nominal-wage growth of 3.3% in the United States and the United Kingdom and 2.8% in France. In 1997, wage earners in Japan received a gross total of ¥279 trillion; by 2012, the total had fallen to ¥244.7 trillion.

In other words, Japan’s wage earners have lost ¥34.3 trillion over the last decade and a half – an amount larger than the annual GDP of Denmark, Malaysia, or Singapore. Only when this trend is reversed can Japan’s economy resume a long-term upward trajectory.

Meanwhile, Japan’s companies are no longer poorly capitalized. I, for one, remember how low the net-worth ratio for Japanese corporations was 15 years ago – below 20%, compared to more than 30% in Europe and the US. As a result, economists said, Japanese corporate behavior would be characterized by over-borrowing.

That is no longer the case. Thanks to the continued surge in corporate profitability and firms’ sustained deleveraging efforts during the last decade and a half, indebtedness has fallen dramatically. In terms of the net-worth ratio, corporate Japan is now on a par with Europe and the US.

Abenomics, I am proud to say, has been successful in a more fundamental sense: we have rebooted Japan’s collective psyche. In the year since my government took office, a mindset of resignation has given way to one of limitless possibility – a shift symbolized for many by Tokyo’s winning bid for the 2020 Olympic and Paralympic Games. As a result, many Wall Street investors have bought the narrative and gone long on Japan.

That is what Abenomics’ first two “arrows” – bold monetary policy and flexible fiscal policy – have achieved so far. How about the third arrow, a set of policies to promote private investment so that productivity growth sustains Japan’s long-term recovery?

Some say that, unlike the first and second arrows, the third is hard to come by. I do not disagree: by definition, structural reforms take more time than changes in monetary and fiscal policy do. Many will require legislation, on which my colleagues in the Diet have been spending much of their time over the last couple of months. During this process, with its seemingly endless and convoluted floor debates, observers should not lose sight of the forest for the trees.

From joining the negotiations for the Trans-Pacific Partnership (TPP) to introducing specially deregulated zones (my own office will oversee their implementation), my government is committed to catalyzing economic recovery by all means available. Here, the wage surprise stands out, because only when the long-missing link between corporate profitability and wages is restored will investment in houses, cars, and other durables, and household consumption in general, finally rid Japan of its deflation and put its economy on a sustained growth path.

The wage surprise draws its inspiration from the Netherlands, where a consensus emerged in the early 1980’s that in order to sustain employment, the burden of taming rampant inflation should be shared by employers and the employed. That consensus was enshrined in the 1982 “Wassenaar Agreement,” named after The Hague suburb where it was forged.

Japan is now witnessing the emergence of a similar national consensus, or, rather, the Dutch consensus in reverse: a shared sense that the government, major industries, and organized labor should work together to increase wages and bonuses (while facilitating incentives that could enhance productivity).

Needless to say, wage levels ought to be determined solely by management and workers. But it is equally true that the emerging consensus among the government, business leaders, and trade unions already has led a growing number of companies to promise significantly higher wages and bonuses.

This is the essence of the wage surprise. It will be an entirely new phenomenon, one that, together with the massive ¥5 trillion fiscal stimulus, will more than offset the potential negative effect of a sales-tax increase. Most important, it will continue to put Japan’s economy on a sustainable growth trajectory. Of this I am certain.

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  1. Commentedsteve from virginia

    For Japanese workers to be paid more, someone has to borrow more.

    Either Japanese businesses need to borrow more or their customers must do so. If their customers are overseas, they must either buy more Japanese goods or pay higher prices for goods they buy continuously. Whether they do so or not is determined by foreign exchange rate differentials.

    Despite yen depreciation, customers of Japanese companies are not buying more as is indicated by Japan's trade deficit, that is the Japanese buy more from overseas than their customers buy from them. There is really no help for that as increased credit from Japan's banks cannot flow to overseas customers. The deficit indicates one aspect of Abe's monetary approach has failed.

    If Japan's customers cannot borrow more then Japanese must themselves borrow. However, it is big business that is borrowing, the funds are directed toward finance speculations instead of investing in workers' pay. Japanese firms buying US firms is an example of this sort of speculation. Workers do not borrow as there are no means for them to repay.

    Abe is attempting to stimulate a corpse. He has inflamed finance excess while doing nothing about the trade deficit which is the real problem in Japan.

  2. Commentedj. von Hettlingen

    Japan's prime minister Shinzo Abe is teem with optimism that his "wage surprise" would "continue to put Japan’s economy on a sustainable growth trajectory".
    Yet the ageing population and slow productivity growth may undermine his bold economic experiment: "Abenomics" - a series of aggressive measures based on the "three arrows" - monetary policy to end deflation; fiscal stimulus to boost government spending on infrastructure; and structural reforms to encourage private investment in the country.
    If all goes well, these three measures, aimed at ensuring long-term sustainable growth in the world's third-largest economy, might one day enable Mr. Abe to recapture the second place ranking, lost to China in 2011.
    Since one year in office, of Mr. Abe's three arrows, the first shows promise in hitting the target, the second takes time to see the full impact, while the third hasn't been truly fired.
    Inflations has gone up a little. As wages stay the same, the price rises are hard to sustain. If people don't have disposable income, they won't spend, unless they can borrow, which the Japanese have been loathe to do after the debt bubble. Besides wages won't go up. Firms aren't going to pay more unless workers produce more, so productivity needs to rise.

  3. CommentedJen PeiWeng

    The light of restoration of Japan economy is still dim as far as what Mr. Abe described on the third arrow-Wage Surprise of Abenomics. The momentum of Japan economy after the first two arrows- loose monetary policy and weak Yen in 2013 is lost it speed. It is difficult to say whether further depreciation of Yen could be achieved in 2014. I do expect there are more economic policies to be in place in the near future if Japan economy is aiming to resurgence.

  4. CommentedJose araujo

    Many of us will keep track on this policies.

    Sounds Japan is the only country where economists are making use of reason and rationality.

    Abeonomics is proving that old K was right, once again, and I have no doubt that the Demand shock will produce results, although I'm a bit apreensive about the raise on sale tax...

  5. CommentedMargaret Bowker

    This article by Shinzo Abe illustrates that an entrenched problem calls for a substantial, comprehensive plan for its solution. I have followed the first two arrows of the effective Abenomics policy, having argued for the 2% inflation target in monetary policy and that pro-active fiscal policy should work alongside. Now the focus is on the third arrow, structural reform, which by its nature, engenders less dramatic, short-term visible effect, but is equally as important. The first two arrows had clear impact whereas the third requires time and persistence, as the Prime Minister says, and this ‘wage surprise’ policy is just what is needed to show things are moving. Increased wages lead to greater levels of confidence and with monetary policy keeping a watchful eye, are capable of more than balancing any necessary debt reduction measures. Instituting the right structural policies creates the sentiment that the time is right to put more yen in people’s pockets with all that means in economic growth. It reinforces the message that Japan is achieving its goals. I enjoyed this inspiring article and believe it is very useful to set out high level, readable extrapolations of important policy.

  6. CommentedBoon Tee

    Abe believes Abenomics is working, having shot the first two arrows seemingly successfully. One would think that he should not be over-elated by Japan's economic growth in 2013 (after decades of stagnancy) and use it as the basis of waging a war.

  7. CommentedAvraam Dectis

    Many of us wish similar policies would be effected in our countries, and so, wish Mr. Abe the best of luck in proving his policies.

  8. CommentedProcyon Mukherjee

    We have a few things to ponder: Japan's Total Factor Productivity growth has not been bad, in fact in comparable industry segments it is better than Korea or China. Where the total productivity growth has kept Japan in check is the lower input hours worked, which is entirely due to Japan's demographic issue. Therefore given the constraints Abe is right that productivity linked incentives in the wage is a very important factor for Japan to further do better.

  9. CommentedMr Econotarian

    Wage rises cannot cause economic growth. Only increased productivity can increase growth.

    Japan will grow much better when it opens itself up further to imports and immigration, to allow complementary labor and production to free up Japanese people and companies to concentrate on production. Japanese women should have affordable south asian nannies for their children so they can go to work as computer programmers. Japanese companies need to be exposed to the full competition of global companies to help them understand how to be the best. Japanese farmers should teach their children how to be engineers, and let the rice be imported from developing countries.

  10. CommentedJoshua Ioji Konov

    When you started the so called Abenomics many of so called "economists" were predicting economic disasters, I did predict the positive results, however, if these policies to continue their positive effect on the overall economy the small businesses and investors should become equal to the big ones market participants: the liquidity injected should come done to build an improving market equilibrium even where the basic theories in modern economics call such approach incomprehension.

  11. CommentedGunnar Eriksson

    It is reassuring to finally hear a sensible word from a world leader.
    I hope that the wage increases will end up with those needing the money, that spend them in a way that will create growth, as the 3.3 % in the US has been feed to the "one %" only and mainly create asset bubbles