Japan Cost-Cutting Leaves Compensation Nearing Crisis Low
Cost-cutting by Japanese companies is dragging on wages, resulting in weaker consumer demand and a stronger case for monetary easing to counter deflation.
Nationwide compensation fell to 243.5 trillion yen ($3.1 trillion) in the second quarter, according to a government report in Tokyo yesterday. The number, which is seasonally adjusted, was only 0.7 percent above the level in the final quarter of 2009, which was the lowest since 1991.
Sharp Corp. (6753) today unveiled additional wage cuts, joining fellow exporter Panasonic Corp., and Tokyo Electric Power Co. (9501), the operator of the nuclear plant destroyed by the 2011 tsunami, in compressing costs. The moves risk prolonging the deflation that’s plagued Japan since the 1990s, and hurting consumption already facing a threat from a sales-tax boost looming in 2014.
“As long as wage deflation continues, there will be no doubt that the Bank of Japan will have to continue monetary easing,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “There won’t be an end.”
Second-quarter economic growth was yesterday revised down to an annualized 0.7 percent from 1.4 percent, fueling concern a contraction is possible in the three months ending September. The Nikkei 225 Stock Average (NKY) closed 0.7 percent lower today, paring this year’s gain to 4.2 percent, as investors focused on Europe’s debt crisis, including the struggle by Greece to qualify for aid.
Sharp today said it will reduce managers’ salaries by 10 percent starting next month and cut bonuses in half to save a total of 14 billion yen ($179 million) in fixed costs. The Osaka-based company already lowered manager wages by 5 percent in April and their bonuses by 30 percent in June. Similar reductions will be applied to union members after discussions are completed, Sharp said in a statement.
Finance Minister Jun Azumi said today that the government will keep monitoring the Japanese economy “for a while” before deciding whether any extra policy measures are warranted. In one positive sign, Japan’s largest manufacturers turned optimistic for the first time in four quarters, according to a government index released today.
Unit labor costs, measured by the difference between growth in compensation for workers and real gross domestic product, fell 3.6 percent in the three months through June from a year earlier, the largest decline since the July-September period in 2010, according to data compiled by Bloomberg.
Goldman Sachs Group Inc. says declines in nominal wages are lengthening the route to an exit from deflation. JPMorgan Securities Japan said this month that softness in incomes may partly explain a weakening in private consumption.
The Bank of Japan (8301) remains distant from a 1 percent inflation goal, with the benchmark consumer-price gauge falling 0.3 percent in July from a year earlier. At the same time, the government sees improvements ahead, predicting the gross domestic product deflator, the broadest gauge of price trends, will rise 0.2 percent in the year ending March 2014, the first increase in 16 years.
In China today, a central bank report showed that new lending last month was the highest of any August on record, as banks extended a more-than-estimated 703.9 billion yuan ($111 billion). The extra money may aid government efforts to reverse a slowdown in the world’s second-biggest economy. At the same time, M2 money supply rose a less-than-estimated 13.5 percent.
Australian business confidence declined in August as a slowdown in global growth intensified pressure on the resources industry that drives the nation’s economy, a National Australia Bank Ltd. survey released in Sydney today showed.
Other economies in the Asia-Pacific region are showing signs of withstanding the slowdown. Philippine exports rose for a fourth month in July, a report showed today. New Zealand consumer purchases on debit, credit and store cards at retail outlets rose by the most since December 2002.
The U.S. will probably report a trade deficit of $44 billion in July, according to the median estimate in a Bloomberg News survey ahead of a report today.
Besides falling prices, the economic backdrop in Japan includes declines in exports and industrial output in July, the most recent month for which that data has been released.
“The economy has been losing momentum this quarter, with exports likely to decrease while consumption and capital spending are deteriorating,” Kiichi Murashima , chief economist at Citigroup Global Markets Japan Inc., said after yesterday’s report. “The chance that the Japanese economy will slip into a contraction in the third quarter is increasing.”
The Bank of Japan may increase its asset-purchase program at a meeting on Sept. 18-19 if the U.S Federal Reserve leads the way by easing, Daiwa Institute of Research in Tokyo says.
Panasonic will probably cut costs by 130 billion yen this fiscal year after reducing them by 64 billion yen in the first quarter from a year earlier, according to Chief Financial Officer Hideaki Kawai.
Some businesses are moving operations overseas to locations where workers are paid less, a shift illustrated by Nissan Motor Co. making cars abroad to sell in Japan.
Tepco, the operator of the wrecked Fukushima plant, needs to contain costs after the government ordered it to scale back an electricity rate increase. The company predicts a net loss of 160 billion yen in the year ending March 2013.
At Mitsubishi Research Institute, economist Akihiro Morishige said that causes of declining labor costs include exporters’ efforts to compete with companies from nations where workers earn less.
“To compete against China and other Asian nations which have lower labor costs in relation to Japan, Japanese exporters need to secure profits by cutting fixed costs, such as wages,” Morishige said. In Japan, “deflationary expectations” make it more difficult for companies to pass on higher costs to consumers, the analyst said.
The government faces the risk that boosting the sales tax to help contain the world’s biggest public debt will be a further drag on consumption.
“There will be a flood of demand right before the sales- tax rise, and a reaction to that after it rises,” said Masahiko Hashimoto, an economist at Daiwa in Tokyo. “There will almost definitely be a chill in consumption when the tax is raised.”
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