Will the Winter Bonus be a Savior?

Slowing-down economy and a “record-high” winter bonus

There is a growing concern that the economy may have been slowing-down since this summer. Industrial production has declined in the second and the third quarters. Business Conditions D.I. of the Bank of Japan’s Tankan survey in September shows that the firms are expecting the business conditions to deteriorate towards the end of this year. Private sector forecasters are continuously revising their GDP forecast for the third quarter downwards.

In spite of the pessimism, there are reports that the amount of winter bonus for this year may be a record high. Keidanren (Japan Business Federation), for instance, announced in October 30 that the average winter bonus for the surveyed firms was 910,697 yen, an increase of 3.13 percent over the year before. It is said to be the highest bonus for a survey done at this time of the year (it would be revised periodically as new information arrives).

Final outcome of the winter bonus may not be so high

Why is the winter bonus so high even though there are unfavorable signs of the economy showing up? Would the winter bonus contribute in supporting the economy from slowing-down further?

There are a number of things that needs to be bear in mind when answering this question.

First, winter bonuses for about half of the firms are already determined in spring along with the summer bonuses. According to a survey by the Ministry of Health, Labour and Welfare (MHLW) for 2014, 43.5 percent of the firms had determined the winter bonus in spring (what we call “summer-winter” type). The bonus payments of the kind therefore should reflect the profitability or its expectations at that time. In comparison, only about 47.1 percent of the firms decide bonuses each time before the payment. As a result, a survey result that is published at this time of the year should be higher than the final result which would reflect more recent profitability of the firms.

Second, each of the surveys has a different mix of large and smaller firms. For instance, the Keidanren survey cited above is a survey of large firms; firms that are listed at the First Section of the Tokyo Stock Exchange, and also have more than 500 employees. Since large firms have been more profitable than the smaller ones under the recent business conditions, surveys with higher portion of large firms should tend to show higher figures than the average.

Third, each of the surveys also has a different mix of manufacturing and non-manufacturing forms. The Keidanren survey only includes 2 non-manufacturing compared to 78 manufacturing firms. The effect of the mix, however, is ambiguous. This is because the business conditions in the period up to this fall was better for the non-manufacturing sector than the manufacturing leading to about the same, or somewhat better, spring wage round outcomes. However, the Tankan survey shows that the situation is expected to be worse in the non-manufacturing than in the manufacturing sector towards the end of the year.

Considering the above, it could be the case that we may see the actual outcome of the winter bonus to be somewhat lower than the current survey shows.

The impact on the economy may also not be so strong

Even if it turns out to be contrary, so that the outcome of the winter bonus is considerably high, the impact it may have on the economy may not be so strong for the following reasons.

It is true that bonus payments commands a large share of the wages received in the season (December for the most of the recipients). It is usually two to three months’ worth of basic wages. Therefore, any increase of bonuses would mean a non-negligible impact on total wages for the recipients.

However, that is the case only for the regular workers (those who are subject to lifetime employment). In the case of non-regular workers, they do not, in general, receive bonuses. Since the share of the non-regular workers is about one third of the total labor force, the impact on the total wage payment is correspondingly smaller.

Increase in private consumption that results from the increase in total wage payments would also be small. That is because, unlike the increase in basic wage payments (or the increase in the “base-ups”) that can be considered to be increase in the permanent income, increase in bonus is only an increase in transitory income. It should result in smaller portion leading to additional consumption expenditure. Any increase in uncertainty may further reinforce the limited response of private consumption to the increase in total wage payments (i.e. increase in precautionary savings).

Finally, the impact of wage increase would also be smaller because of the increasing number of households depending on pensions. Since they are not influenced by wage developments, the channel that wages affects consumption is restricted. Moreover, the negative impact of pension reform on pension receipts may partly offset the positive impact coming from increase in winter bonus (for further discussion on this point, please see my column in September https://www.jcer.or.jp/english/private-consumption-and-pension-reform).

Bonuses are results of the business conditions

The discussion above leads us to be cautious about being overly optimistic about the winter payments and their impact on the economy. Since bonuses are arrangements to distribute part of the corporate profit to the employees, they would reflect the business condition at the time, rather than them influencing the business conditions. Winter bonuses do not seem be the savior for the current economic conditions.