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Why Are Wages Stagnant in Japan? (Nov 2013)

Strengthening the third arrow of Abenomics (growth strategy) is the true path toward revitalizing Japan’s economy

Mitsumaru Kumagai

Masahiko Hashimoto

Tsutomu Saito

Shotaro Kugo


Economic outlook revised: In light of the first preliminary Jul-Sep GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +2.6% y/y for FY13 (previous forecast: +3.0%) and +1.0% for FY14 (+1.2%). We have revised our economic outlook downward mainly in view of the economic growth rate for Jul-Sep 2013 coming in lower than anticipated.

◆Main scenario for Japan’s economy: After hitting bottom in November 2012, Japan’s economy has entered a recovery phase. We believe it will continue to expand steadily supported by (1) increases in exports based on the backs of the US economic recovery, (2) ongoing depreciation of the yen and the rise in stock prices supported by the BOJ’s monetary easing, and (3) economic stimulus measures to offset the effects of the consumption tax hike. Risks that will need to be kept in mind regarding the Japanese economy are: (1) turbulence in emerging economies, (2) China’s shadow banking problem, (3) a reigniting of the European sovereign debt crisis, and (4) a surge in crude oil prices stemming from geopolitical risk.

Why are wages stagnant in Japan?: The need to increase wages has become a leading political issue in Japan. In this report, we provide a multifaceted examination of the reasons why wages have stagnated in Japan and present our outlook going forward. First, an international comparison of real wages demonstrates that wages are stagnating in Japan not because labor’s share is low, but because there are issues involving labor productivity and corporate competitiveness. Thus the key is to increase labor productivity and improve corporate competitiveness by strengthening the third arrow of Abenomics (growth strategy) in order to raise real wages in Japan. Second, a simulation of the future direction of wages reveals that wages are likely to gradually trend upward as the economy undergoes a cyclical recovery. It is also highly likely that regular payments will continue to grow at the macro level given an improvement in the supply-demand balance for labor. However, the increase in per-employee wages will be limited if it is based solely on a cyclical economic recovery. For wages to exceed their former peak, it will be crucial for the government to (1) strengthen the third arrow of Abenomics (structural reform of non-manufacturing and medical and nursing care sectors) and to (2) address the problems associated with non-regular employment. Companies will also need to accelerate the pace of wage increases as much as possible to avoid the “fallacy of composition”.

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