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Japanese Economy Update

Highlight of the 2017 Spring Wage Round Drawing Near

  Senior Research Fellow


Spring wage round in the spotlight

Despite the tightening of the labor market conditions, average wages of the Japanese workers have not yet risen in a reasonable manner. While wages for the non-regular workers have increased considerably, that for the regular worker still remains limited. Unless the wages for the regular workers rise, however, prices will not come up and inflation target will not be achieved. Irritation in this respect has apparently led to the last year’s IMF proposal of an incomes policy to be adopted in Japan: It argued for a base-up (upward shift in pay scale) of three percent.

This is the reason why the spring wage round for 2017 is once again in the spotlight. The Rengo (Japanese Trade Union Confederation) has set the target wage increase for the round to be four percent; two percent base-up plus two percent increase for moving up the pay scale. While it fell short of the three percent base-up recommended by IMF, it still exceeds the actual base-ups that have been achieved in the past three years. Based on this target, member unions have made their specific demand to their employers, and have been negotiating since early this year. Many of the large companies are expected to respond to the demands at around March 15.

Return of the base-ups in 2014

Spring wage round entered a new stage in 2014 when it succeeded in achieving a wage increase of 2.1 percent with a base-up of about 0.5 percent. While the base-up was limited, it was the first base-up in more than ten years. It was expected at that time that, as the labor market continues to tighten and corporate profits to improve, base-up will continue to increase in an accelerated manner. It was considered to be an important part of the transmission mechanism of the Quantitative and Qualitative Monetary Easing (QQE) policy adopted by the Bank of Japan in achieving the two percent inflation target.

Disappointments with the recent base-ups

However, even though corporate profits improved and labor market tightened, base-up did not show acceleration. The result of the spring wage round in 2015 was only little better than that in 2014: a wage increase of 2.2 percent with base-up of 0.6 percent. The spring wage round in 2016 even saw a slowdown of the wage increase to 2.0 percent with a base-up of 0.3 percent.

Furthermore, breakdown of the outcome of spring wage rounds shows that base-ups were also limited in terms of their breadth. Examining the data for the detailed outcome of the spring wage round of 2016 reveals the following features. (For more information, please see the report published in October 2016 by a working group of the Rengo’s Research Institute for Advancement of Living Standards).

First, wage increase differed by sectors. Most of the sectors saw an increase in the range of 0.2 percent to 0.3 percent; but the wages in the information and publication industry rose by more than 0.9 percent, while those in the service and hotel industries remained flat.

Second, wage increase differed by the size of the unions. Average rate of base up was not that different across the unions of different size. However, the base-up rate of the median (the value for the middle sample of the sequence) was the highest for unions with more than 1000 members at 0.4 percent. The median fell as the size of the membership became smaller, and for unions with less than 9 members, it was zero.

Third, wage increase differed by regions. While many of the regions saw an average base-up of between 0.3 and 0.4 percent, Hokkaido/Tohoku and Shikoku as well as “Others” saw lower base-ups at between 0.2 and 0.3 percent. The difference in median rate of base-up is more clear when Tokai, achieving the highest of more than 0.4 percent, is compared with Shikoku and “Others” showing only 0.1 percent increase.

Some explanation may be needed for the category “Others.” This category includes labor unions that cover members who belong to more than one prefecture. It includes such union as Japan Postal Group Union who saw no base up due to the negative impact of the negative interest rate policy introduced by the Bank of Japan. The Japan Post Bank, which is the banking arm of the Japan Post Group, had a large amount of the Policy-Rate Balance which was subject to the negative interest rate.

These features show that base-ups, so far, have not responded to improved profitability and tighter labor market in a significant manner. Moreover, base-ups seem to have concentrated in large unions (i.e. large firms) and in Tokai, Kanto, and Kyushu regions: They have not yet spread to smaller unions (smaller firms) and to wider regions in the country.

Will base-ups accelerate and spread?

This year’s spring wage round enjoys a somewhat better environment than a year ago. Unemployment rate has fallen from 3.2 percent a year ago (January 2016) to 3.0 percent in January 2017. Labor shortage has become so acute that Yamato Transport had to review the business practice of its door to door parcel delivery service. Corporate profit is also expected to grow by about 0.9 percent in FY2016 thanks to the recent depreciation of the yen (forecast by the JCER).

On the other hand, future of the Japanese and the global economy is undoubtedly subject to great uncertainty with respect to policy developments in the U.S., Europe, and Asia.

Will the better environment lead to an acceleration of base-ups? Will the base-up spread to wider industries, firms, and regions? Or will the future uncertainty be the overwhelming factor in the firms’ decision about their base-ups?

The outcome of the 2017 spring wage round is watched with great interest.