The Japan Wage Story: Why Your Headlines Are Wrong
STOP believing the 'crushed wages' headlines. CLSA reveals why Japanese workers are secretly winning and a wage rocket is coming.
Forget the Gloom: Demographic Shifts, Not Corporate Greed, Are Masking a Coming Wage Boom
The narrative you often read in the media paints a grim picture of Japanese workers suffering under a heartless corporate system, with wages crushed despite massive corporate profits. But as the stock market strategist for CLSA in Tokyo, Nicholas Smith, I argue that this widespread perception is fundamentally flawed.
It’s true that key figures from the Ministry of Health, Labour and Welfare show a persistent decline in average real wages—they even fell for 23 months in a row. Critics of Abenomics, like Richard Katz, point to these statistics as proof that corporate profitability isn't trickling down. However, accepting these average figures at face value means missing the deeper, more positive truth hidden beneath.
The Real Drivers: Demographics and Soaring Household Income
I contend that the decline in average real wages is not the result of companies deciding to pay less. Instead, it’s the inevitable outcome of two massive, demographic mega-trends.
First, the highly-paid men of the post-war baby-boom generation are retiring en masse. As these senior workers, who pull up the average, leave the workforce, the average wage naturally drops.
Second, a huge wave of women, typically in their 40s, is re-entering the workforce, often taking part-time work after raising children. For the individual households where this is happening, the economic picture is anything but gloomy.
Since part-time wages for women are roughly half of what men make, the returning women's earnings can boost a household's total income by as much as 50%.
Evidence of an Inevitable Wage Rocket
The underlying data suggests that a wage boom is both affordable and inevitable. Consider these facts:
The jobs-to-candidates ratio is 115 to 100—the highest ratio since 1993. This incredible labour market tightnessalone signals higher wages are coming.
Japanese pre-tax corporate profits are three times as high relative to GDP as they were in 1997. Remarkably, while nominal GDP has fallen 8% since 1997, corporate profits have surged by 106%.
Bankruptcy levels are the lowest since the 1980s.
The pressure is especially acute in the service industry, which is excellent news for young people and women who are disproportionately clustered there. The unemployment rate for 16-to-25-year-olds has already plummeted from around 11% in 2010 to just 6% now. With the youth population continuing to shrink by 1.5% annually, wage pressure will persist. Furthermore, I suspect the widespread lack of a national tax ID system leads many employees and corporations to under-report their actual incomes, further muddying the official statistics.
The Consumption Conundrum
While the facts point toward soaring household incomes and an upcoming rise in wages, even I must admit that consumption has been decreasing in Japan. While I believe this isn't due to lower wages—as consumption has risen in the past even when wages were declining—it remains a crucial puzzle. Consumption accounts for 60% of GDP, so understanding why higher household earnings aren't stimulating it is paramount. Observers are right to consider the role of inequality; labor’s share of income has dropped 5.3 percentage points since 1997. This highlights a necessary and urgent debate for Prime Minister Abe: how to structure reforms to ensure workers benefit relative to corporations.