Wages Lag Inflation For the Japanese

by on February 6, 2014 6:52 am BST

Japanese base wages, adjusted for inflation, in 2013 matched a 16-year low in 2009, and it is posing further risk to consumer spending as a sales tax increase of three percent is due to hit this April.

Prime Minister Shinzo Abe is requesting businesses to increase wages to sustain the endless pursuit of inflation after the yen has dropped 18 percent  last year against the greenback. The Bank of Japan (BoJ) has been trying to fight deflation but the inability for business to up their willingness to pay their employees more has been a major barrier.

Pay, ex-bonuses and overtime, dropped to 98.9 (out of 100) last year on the labor ministry index and matched levels since in 2009. Companies will begin to converse about potential wage increases, but it is likely to be a situation case-by-case basis. “Each company will do their utmost to increase wages depending on their earning situation,” said Hiromasa Yonekura, head of Japan’s largest business lobby group Keidanren.

Abe has urged companies to raise salaries, but there might be a few reasons why it has not happened yet. Businesses may be uncertain of the Japanese economy going forward. With unprecedented quantitative easing and unstable growth, companies may be hesitant (similar to what is seen in the United States). Also, compensation has undergone changes. For instance, there has been a transition to seniority-based pay to a performance-based pay.

The BoJ has nearly achieved their two percent inflation target less than a year after their massive asset purchasing program has been announced. The problem is that nobody knows the risks associated with the program and what would happen if the BoJ begins to taper. BoJ Governor Haruhiko Kuroda has not gave any insight to when or how the bank will pull away, but he has mentioned that reaching the two percent target will not necessarily be the end of the asset purchases.

However, starting in April, inflation will outpace rages by five-fold.