ABENOMICS ON TRIAL
Tax hike reaction and worries about social security reveal deep unease. By Mitsuru Obe and Akane Okutsu in Tokyo
On a chilly January afternoon in Yokohama, a 25-year-old IT company employee says what much of Japan is thinking: “I’m not expecting my salary and the economy to improve much.”
He has only been in his job for a year, following graduate school. But any excitement he might have felt about this new beginning is overshadowed by fears for the future. How, he wonders, will he cover the expenses that inevitably come with marriage, children and looking after ageing parents?
Takahide Watanabe, a 58-year-old at a very different point in his career, struck a similarly sombre tone. “Companies don’t give employees a big pay raise because they don’t know what will happen next.”
Gloom is hanging over the country after years of Abenomics — Prime Minister Shinzo Abe’s programme to get the Japanese economy humming again. To an extent, it worked, powering a streak of expansion that lasted more than seven years.
But gross domestic product (GDP) shrank by 6.3% year-on-year in the fourth quarter of 2019 — largely the result of one-off factors such as typhoon damage and the consumption tax increase that took effect on Oct 1.
This raises fresh questions about the economy’s resilience just as Japan’s longest-serving leader confronts the added threat posed by the coronavirus.
The immediate focus is on consumers’ response to the tax increase. Economists expected shoppers would pull back, as households tend to make big purchases before a hike. Still, many thought the modest rise from 8% to 10% would not be enough to send the economy into a contraction.
But department stores have taken a beating. Sales have dropped for three straight months, including a 5% year-on-year fall in December, according to the Japan Department Stores Association.
“There has been little sign of a recovery from declining sales of apparel items,” said a spokesperson for J Front Retailing, which runs the Daimaru chain.
An Odakyu Department Store representative said slow sales of “clothing and daily goods are expected to drag on until the spring”. The tax increase was not the only factor, she said — a relatively mild winter and the effect of Covid-19 on tourism are part of the equation.
At the consumer electronics retailer Bic Camera, sales of TVs and refrigerators have dropped since the pre-hike rush, though a spokesperson did say “TV demand is coming back ahead of the Olympics” in Tokyo this summer.
Consumer behaviour is also shaped by Japan’s decades-long struggle with deflation.
“Japanese consumers tend to react strongly to any price increase because they are not used to inflation,” said Naoki Takayama, assistant professor of economics at Hitotsubashi University. “They are very sensitive, even to a very modest shock.”
But sentiments like those of the young IT worker in Yokohama hint at a deeper malaise. Take it from Takeshi Niinami, the president and CEO of the spirits maker Suntory Holdings. Japan’s economy “doesn’t appear to get worse, but neither does it appear to get much better”, he said.
New stimulus measures set to take effect in the fall, including a programme that will reward My Number social security card holders who make cashless retail transactions, “give me reassurance about the outlook”, he added. “But with increases in social security and medical expenses, it would be hard to feel an improvement in the economy.”
Those expenses, some say, are the crux of the problem.
Japan’s ageing population and low birthrate mean that a smaller working-age population will have to support the growing number of seniors.
For Abenomics, this is a ball and chain.
The Japan Business Federation argued recently that rising social security payments had eaten away more than 30% of salary increases from fiscal 2013 to 2018.
For 2020, the government lowered the cap on taxpayers’ standard income deductions to ¥1.95 million (US$17,700), from ¥2.2 million — a move that will hit workers earning more than ¥8.5 million a year. Meanwhile, although employee pension insurance rates have been held at 18.3% of monthly salaries since 2017, rates for the public health and nursing care insurance are expected to keep rising.
The federation’s argument, however, brings up a more basic problem: low wage growth.
Pay raises have lagged price and tax increases, leaving real wages down 3.5% from 2012 to 2018, labour ministry data shows. This is despite an unemployment rate that, at 2.2%, is at a 27-year low.
This disconnect between wages and unemployment — which are supposed to show an inverse relationship — has long been a source of puzzlement for economists. But changes in the makeup of the workforce offer clues.
Large corporations, faced with a shrinking Japanese market, have sought to reduce the costs of their domestic operations. One way to do this is to increase temporary workers while reducing expensive “lifetime” employees.
In addition, as older workers reach the retirement age of 60, many wish to remain in the labour force. But this usually means taking a temporary position with much lower pay.
So while the overall number of employees actually rose by 4.5 million from 2013 to 2019, hitting 56 million, non-regular employees accounted for 2.5 million, or 57% of the increase. These workers total 21.7 million, or 38% of all employees.
Fast Retailing, the operator of the Uniqlo clothing chain, had 80,758 temporary workers as of Aug 31 last year, up 12% from the year before.
The growing ranks of non-regular workers puts pressure on average nominal wages, which remain 13% below their peak in 1997. From 2012 to 2018, nominal wages grew only 2.6%.
Another factor working against wage growth is pressure on Japanese companies to improve shareholder returns, noted Ryutaro Kono, chief economist at BNP Paribas.
“Japanese corporate managers have responded to shareholder pressure by reinforcing the dual labour structure, as they have struggled to increase profits through product innovation,” Kono said. The growing influence of shareholders has spurred many executives to chase short-term returns through cost cuts, he added.
“Reserves are piling up in Japanese companies,” he added.
Even when workers do land a better-paying position, it is difficult to shake their sense of insecurity.
“My hourly wage has increased after changing my job,” said a woman in her early 40s who asked to be identified by her surname, Yoshida. She is unmarried and lives alone. Her parents have already passed away.
“After the consumption tax hike, I think more carefully before I make purchases: Is this something I really need?” she said. “I’m saving money in case something happens because I have to take care of myself. I am worried because the economy doesn’t look good.”
If traditional companies cannot break this impasse, might the “third arrow” of Abenomics — deregulation — offer hope?
This arrow is aimed at spurring innovation, startups and new industries. But economists and entrepreneurs are sceptical.
They say the effort to trigger industry disruption has been halfhearted at best. The government, apparently, is wary of economic instability and reluctant to create losers as well as winners.
“More dynamic policy steps are needed to spur deregulation and innovation, following the initial phase of recovery led by large corporations. Such measures are still missing, however,” said Junichi Kanda, executive officer at the financial technology company Money Forward.
Instead, the Abe government has doubled down on the traditional tools of monetary easing and fiscal stimulus.
In December, the government unveiled ¥13 trillion worth of extra spending to support economic growth.
And while true structural change remains elusive, the coronavirus outbreak has emerged as a serious danger to the economy. The Dai-ichi Life Research Institute estimates that the drop in travel demand alone will reduce Japan’s GDP.
That is just one more reason for workers to tighten their belts.