Feb 1, 2023
BOJ’s Policy Path Hinges on Japan’s Complex Wage Dynamics
(Bloomberg) -- Bank of Japan Governor Haruhiko Kuroda has placed wage growth at the center of debate over whether potentially market-jolting policy change looms at the central bank after years of massive stimulus.
Kuroda has insisted that the BOJ’s ultra-loose policy must continue until there are signs that inflation can be sustained by stronger pay gains.
Some of Japan’s biggest companies including Suntory Holdings Ltd and Uniqlo-operator Fast Retailing Co. are already making moves to ramp up wages by much more than usual as inflation hits a four-decade high. If this early momentum gains traction, the economy appears headed for an inflection point that may be used to justify change under a new BOJ governor starting in April.
But the reality is not so simple. Japan’s labor market lacks the flexibility seen in the US or the UK, with major unions having prioritized job security over pay for decades.
And while Kuroda has said pay increases of 3% would support sustainable inflation of 2%, it isn’t clear how widespread the gains need to be or which wage indicator might trigger a policy shift.
Japan’s spring wage negotiations between labor unions and companies, referred to as the shunto, set the tone for pay growth in the country every year. The first results usually come out in March and are often revised down when the final tally including data from smaller firms is released in July.
Overall wage growth in these negotiations is composed of a base-pay hike and seniority-based raises. Without gains in base pay, wage momentum remains broadly the same because the other increment is scheduled anyway.
This year, Goldman Sachs Group Inc. forecasts a 2.8% gain in overall pay but only a 1.2% rise in base pay.
Still, the closely followed shunto results don’t mean much for many workers.
While the proportion of unionized workers is almost 40% at companies with 1,000 or more employees, the overall unionization rate for Japanese employees hit a fresh low of 16.5% last year. The rate was 12.5% for women and 8.5% for part-timers.
Some 76% of Japan’s workforce are employed by companies with less than 1,000 workers. Ultimately, the shunto results only offer a snapshot of wage levels for a minority of people.
The type of employment matters, too. Part-time, contract and seasonal workers, collectively known as non-regular workers, make up more than a third of the workforce. Unlike employees with permanent contracts, they are vulnerable to job losses — a reality that was once again confirmed during the pandemic.
On average, they get paid 33% less than regular workers but the more fluid dynamics of this segment of the job market means they could be in line for bigger gains. Still, larger pay checks for them would close the gap with regular workers more than accelerate overall wage dynamics.
A broader wage indicator, reported monthly by the labor ministry, reflects wage changes including overtime and seasonal bonuses, and covers all employees. The data is perhaps a more helpful gauge for judging actual wage dynamics than the closely watched shunto figures.
Cash earnings have grown at an average year-over-year pace of around 0.3% over the past decade, but gains have reached 2% in three of the last nine months of released data. The last time they rose above 3% was in January 1997.
That still means real wages have been falling for eight months straight, unable to keep up with accelerating inflation.
A tight labor market is helping support the pay gains. But Japan’s track record also shows that strong demand for workers by itself doesn’t lead to an acceleration of wage growth.
Before the pandemic hit, the country’s jobs-to-applicants ratio soared to its highest since the 1970s, with as many as 164 positions available for every 100 job seekers. That still wasn’t enough to lift wages to the levels Kuroda is now arguing for.
That’s partly a reflection of the strength of regular workers’ preference for job security over pay hikes, and the low wage base for everyone else whose jobs are more unstable.
Still, at the very least, a tight labor market combined with inflation is a stronger combination for generating the signs of wage growth needed to justify change at the BOJ.
©2023 Bloomberg L.P.