Haruhiko Kuroda can now give his troubles a name: Toyota. It's hard to draw a kinder conclusion as the company that's benefited most from the central bank governor's easing policies offers its 63,000 union employees a measly $33 per month pay hike.
Kuroda stood pat at today's BOJ policy meeting, despite warning that inflation could temporarily decline to zero percent if not go negative because of falling energy costs. The hope is that lower oil prices and annual raises, which are being negotiated between unions and corporations right now, will finally encourage Japanese to start spending again.
It's becoming clear, though, that Kuroda needs to worry as much if not more about a "deflationary mindset" among companies as consumers. Take Toyota, which makes more profit than all other Japanese carmakers combined. It's offering to raise monthly base wages by a piddling 1.1 percent, one-third less than what the Toyota Motor Workers’ Union requested. That's the equivalent of sharing four days of profit with employees; the company earned a record $18 billion profit this year, largely because of the 30 percent drop in the yen engineered by the BOJ's quantitative-easing program. Even Nissan, which is expected to offer the largest base pay increase among domestic manufacturers, is only looking at increasing wages by about $41 per month.
Kuroda's focus is on generating 2 percent inflation. But deflation remains a symptom of Japan's two-decade funk, not the cause; forcing prices upward won't necessarily lead to revived growth. Last month, when 81 percent of respondents in Nikkei poll said they weren't benefiting from Prime Minister Shinzo Abe's reform program, they made clear that a main reason they weren't spending was because costs were rising while wages weren't.
Why are companies being so chary? Weak unions don't help matters; they've long been co-opted by a system they're supposed to be squeezing for concessions. But the larger problem seems to be that executives remain unconvinced by the government's reform efforts. When Kuroda launched modern history's most audacious monetary experiment two years ago, he hoped that by buying $700 billion of public debt annually, and then some, the BOJ would increase demand for credit, boost asset prices and ignite wage gains. Yet corporations appear to be waiting for the third phase of Abenomics -- pro-growth steps to deregulate industry, loosen labor markets and enliven growth -- before they feel confident enough in future prospects to ramp up wages. In effect, they're calling Tokyo's bluff.
Standing pat, or even opening up the spigots wider, won't likely change things. In an interview with Bloomberg News, University of Tokyo economist Tsutomu Watanabe suggests an interesting idea: The government should look beyond bond buying and reengage in old-fashioned industrial policy to force companies into being more generous. "Generally, a central bank shouldn’t get involved in wages, but in these kinds of circumstances, it’s unavoidable,” says Watanabe.
What might this entail? Along with implementing his structural reforms more convincingly, Abe could use the bully pulpit to shame executives into fattening paychecks. Rather than cut corporate taxes for all, he could reward companies who share profits with workers. Lawmakers could also slap tax penalties on corporations for hoarding $2 trillion of cash that could be deployed to reinvigorate the economy.
For his part, Kuroda could increase corporate debt purchases and pump more liquidity into exchange-traded funds in return for wage gains. These wouldn't be specific quid pro quo arrangements with companies, but indexed bond purchases that spread the largess out broadly. And why not a little BOJ shaming, too, for good measure? Kuroda could surely buy up more government bonds and give a more deflation-is-dead speeches. Or he could call Toyota headquarters and start demanding a little solidarity.
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