Prime Minister Shinzō Abe has been trying to revive Japan’s economy for more than a year now. Among his goals is to stoke inflation to convince consumers that deflation is over and to start shopping before prices get any higher. Another goal is to persuade companies to hike wages. Many Japanese workers have had few or no raises in years. Abe’s two goals are intertwined: If inflation catches on but wages don’t rise, households will be worse off than before. With a big consumption-tax increase scheduled for April 1, the prime minister needs companies not only to give their workers raises but also to make those raises generous enough to keep consumers from cutting back as prices go up.
With many employers deciding on raises before the April 1 start of the fiscal year, Abe is counting on people such as Yokohama resident Kazuma Aoki to spend. The 34-year-old accountant says work in his office has picked up lately as clients in the construction industry benefit from a rebound in the property market. With prospects improving, Aoki expects to get a 3 percent raise this spring. “I was thinking about doing some work on the house,” says Aoki, who might also buy appliances and take his wife out for a fancy dinner—a 40,000 yen ($394) proposition in the Tokyo area.
Over the past 15 years, wages have dropped 15 percent. In the 11 months through November 2013, pay for the average worker rose only 0.2 percent. Households’ real income fell 1.7 percent in December from the previous year. Base wages, excluding overtime and bonuses, fell 0.2 percent in December, the 19th consecutive month they’ve dropped. The issue of wages, says Martin Schulz, an economist at Fujitsu Research Institute, “is a litmus test for whether Abenomics works or falls apart.”
Employers have reasons to feel generous—or at least more confident. In the last quarter of 2013, vehicle sales rose 19.3 percent from last year, to 1.3 million, the best performance in more than a year. Private-sector machinery orders jumped 16.6 percent in November from a year earlier, the government announced on Jan. 16.
With the weaker yen helping fuel exports and record profits at companies such as Toyota Motor (TM) and Hitachi (6501:JP), Abe is publicly lobbying the big corporations to share the wealth. “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,” Abe wrote in an online commentary in January. Toyota union workers want 4,000 yen more in base pay a month, their first request for a raise in five years, and a bonus of 6.8 months’ salary, up from 5.8 months last year.
With imports of oil, food, and apparel more expensive because of the weak yen, consumer prices jumped 1.6 percent in December. Wages will need to grow faster than inflation to create demand. Lawson (2651:JP), one of the country’s largest convenience-store operators, will give a 2 percent to 3 percent raise to many employees and will likely increase salaries again in 2015. “I guarantee that they will get more next year, after I confirm that deflation is gone,” says Lawson Chief Executive Officer Takeshi Niinami.
Many Japanese employers have doubts, though, about whether they can afford to give their workers significant raises. Average salaries will go up in 2014, but they won’t be able to keep pace with renewed inflation, says Harumi Taguchi, principal economist with IHS Global Insight in Tokyo. She expects wages to go up about 1 percent this year and inflation to rise 2.9 percent.
One thing holding back wage growth, says Tom Orlik, a Bloomberg economist in Beijing, is uncertainty about demand in the quickly aging country. The population fell by a record 244,000 last year, to about 126.4 million, and paying higher wages isn’t easy when your customer base is declining. “Seeing shrinkage in the working-age population,” Orlik says, “makes it difficult for them to have an optimistic medium-term view.”
Hitomi Yotsuya, 24, an assistant at an organic beauty products store in Tokyo, says she’s not optimistic. The increase in the consumption tax “will be tough to cope with,” she says. “Things I don’t necessarily need, I just won’t buy anymore.”