Though base wage increases may be slowing from last year, the outlook for bonus payments is more positive. What does this mean for consumption and the Japanese economy as a whole? Kenichi Amaki, Portfolio Manager at Matthews Asia, assesses wage figures in Japan.
In an effort to revitalise the economy, Prime Minister Shinzo Abe has been pushing the private sector to raise worker pay and try to boost consumer spending. However, media headlines have expressed much disappointment over a slowdown in wage growth and the so-called "failure of Abenomics." But to get a true picture of Japan's wage situation, it is important to look at growth in both base wages and bonus payments. Though base wage increases may be slowing from last year, the outlook for bonus payments is more positive.
Overall, base wage increases in Japan will likely be lower than last year, reflecting economic uncertainty surrounding the recent strength in the yen and a slowdown in its largest trading partners, namely China. On the other hand, bonus payments may be larger thanks to record corporate profits. Media attention seems to be fixated on the base wage hike at Japan's leading manufacturers, particularly in the automotive and electronics sectors, as they set the trend for wage negotiations in the broad manufacturing sectors. So far, base wage increases have been lower than last year, so the media has been on its "Abenomics failure" frenzy. However, they ignore the fact that workers at some of those companies are getting large bonus checks that will increase their total compensation more than last year when base wage gains were higher.
Additionally, wage pressures are now stronger at small and medium-sized enterprises (SMEs) rather than larger corporations. The Japan Council of Metalworkers' Union (JCM), which includes automotive and electronics sectors, reports that base wage gains were higher for companies with less than 300 employees than for larger corporations. This is important as SMEs provide the bulk of employment in Japan.
Even more importantly for Japan, however, is what happens at the lower end of the wage curve where we believe, wages are too low. The national average minimum wage was increased by 2.3% as of October 2015 (previous year was 2.1%). Abe is working to boost wages at the lower end, including plans to raise the minimum wage by 3% per year until it reaches 1,000 yen per hour (it will take eight years from the current 798 yen per hour) and an "equal work equal pay" rule where employers cannot discriminate pay between full-time and temporary and part-time workers if they are doing the same work. More than 30% of Japan's workers are temporary or part-time, and are paid much less than full-time workers. Lower-income workers have a higher propensity to spend; therefore, wage increases at the lower end will have a more significant impact on consumption and hence the economy overall.
The other glaring reality is that labour is in short supply in Japan as the population declines. In 2015, Japan created more full-time than temporary or part-time jobs for the first time in 21 years. Almost 90% of those full-time positions were filled by women. Japan's unemployment rate is 3.3%, while the job offers-to-applicant ratio is 1.28, the highest level since 1992. Regardless of what the government may or may not do, we believe there is a structural upward bias on wages in Japan.
What does this mean for consumption and the Japanese economy as a whole? This is the tricky part. As Japan's population is declining, there is a structural downward bias on consumption and GDP. Higher female labour participation and rising wages may offset the population decline but to what degree is uncertain. For now, we remain cautious on consumption in Japan as inflation in daily goods prices has made consumer spending habits more defensive. Hopefully, younger Japanese will wake up to the fact that they are increasingly becoming a "rare" resource and actually have the upper hand in terms of wages.
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The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect the writer's current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC ("Matthews Asia") does not accept any liability for losses either direct or consequential caused by the use of this information.
