Jeff Uscher’s Japan Insider is one of my daily reads and regularly delivers insights I value and rely upon. Jeff has generously given me permission to share with you his research on why overall wages in Japan are stagnant despite a compelling labor shortage and thus why, despite the best efforts of the BoJ, inflation in Japan will be difficult to achieve for several years to come.
Here’s Jeff:
Mystery Solved: Why Wages Won’t Rise in Japan
It is “One of Those Great Mysteries of Life.” How can it be that, despite more than four years of super-easy monetary policy, laughably low interest rates, and a chronic labor shortage, wages in Japan are barely growing at all?
Everyone pretty much agrees that higher wages are the key to higher inflation. We all hear about higher wages for full-time workers and for part-timers at companies large and small. But, overall, wages have remained stagnant, and inflation has not moved off of the dime.
You can’t blame the Bank of Japan. Under Governor Haruhiko Kuroda, the BoJ has tripled the size of its balance sheet by purchasing several hundred trillion-yen worth of JGBs. BoJ assets have now topped ¥500 trillion—about the size of Japan’s GDP.
Short-term interest rates are negative, 10-year rates have been pegged at “about zero percent,” and USDJPY has risen from 94.18 at the end of March 2013, when Kuroda began his unconventional monetary policies, to 112.67 today. The weaker yen has boosted corporate earnings, and the equity market is trading at multi-year highs—aided and abetted by aggressive BoJ buying of ETFs.
But it seems as if the Japanese economy is immune to easy money. The BoJ has, so far, utterly failed to achieve its target of sustained 2% core CPI (excluding fresh food) inflation. Both the BoJ and Prime Minister Shinzo Abe blame sluggish wage growth for this failure.
Has the BoJ’s aggressive monetary policy achieved anything? In short, yes. Demand for labor has grown dramatically since 2013. Labor shortages, as reported in the quarterly Tankan survey, are worse now than at any time since the March 1992 quarter—the tail end of the Bubble economy.
Just as during the Bubble, the Japanese press is full of stories about restaurants cutting hours because they can’t get enough workers. Japan’s largest parcel delivery company, Yamato Transport (9064) famously told Amazon Japan—its largest customer—that it will no longer accept orders for same-day delivery services because it does not have enough drivers. Technology companies are developing robots and self-driving cars to make up for the chronic labor shortage.
Companies are raising wages for part-time workers in order to attract and keep enough workers. In major cities, fast food restaurants and supermarkets must pay their hourly employees more than ¥1,000/hour to get and keep good workers. Larger companies have offered their full-time employees wage hikes in excess of 2% for four consecutive years—the first time that has happened since the 1990s.
And yet, household income and spending continues to decline.
There is a disconnect between monetary policy and wage growth in Japan. If easy money and a tight job market can’t force companies to raise wages, what can?
I think I have found the answer to this mystery. Several years ago, I did extensive research on Japan’s pension system and on Japanese agriculture for CLSA. Both of these studies required a deep dive into Japanese demographics.
As I thought more about what happens to a person’s income when they retire, it soon became apparent why monetary policy isn’t working and why it can’t be a solution to Japan’s chronic deflation. The problem lies in Japan’s demographics and its employment practices regarding older workers.
First, demographics. The number of births in Japan topped 2.6 million in 1947 and peaked in 1949 at 2,696,638. There were more than 2 million births annually through 1952 and a total of 14.5 million births between 1947 and 1952. All of those people started to retire in 2012. People born in 1952 will retire this year.
Between 1953 and 1960, another 13.5 million people were born in Japan. That means another 13.5 million retirees between 2018 and 2025.
To put this into perspective, between 2012 and 2017, about 2% of the total population hit retirement age every year. Between 2012 and 2017, 11.5% of the total population became old enough to retire. In the thirteen years between 2012 and 2025, 22.2% of Japan’s total population will have reached retirement age.
As we all know, retiring from full-time work means a sharp reduction in income for most people. That is why we save—or should be saving—for retirement. Having 22.2% of your total population retiring in a relatively short period of time is a big hit to Japan’s aggregate income—offsetting higher wages for those people still working.
Second, Japan’s post-retirement employment practices combined with seniority-based pay make the loss of income even worse than it might be otherwise.
Legally, companies are required to allow anyone who wishes to continue working to do so until at least age 70. But the law does not require companies to keep older workers on as full-time employees.
Typically, what happens is that, when an employee retires, he receives a lump-sum cash payment based on years of service and other factors. The lump-sum payment is a buyout of the employee’s full-time status by his employer. By accepting the payout, the retiree agrees that he is no longer a full-time employee, and the company is relieved of its obligation to pay the retiree full-time wages and benefits.
In most cases, workers who retire as full-time employees at age 65 will continue to work for the same company as a contract employee. What this means is that a worker can complete his last day as a full-time employee on Monday and return to work as a contract worker on Tuesday. But, as a contract worker, his compensation will be cut substantially—45% to 55% is not uncommon—even though he is doing the same job for the same number of hours on Tuesday as he did on Monday.
To make matters worse, seniority-based compensation means that a company’s most expensive workers are its oldest workers—at least for as long as they remain full-time employees. Under Japan’s seniority system, older, full-time workers get paid the most. Post-retirement workers and young workers get paid the least. When a person retires, he falls from the top of the pay scale to the bottom, never to rise again.
Looking at Japan’s working population, the number of expensive, older, full-time workers has fallen by 1.05 million since 2011, when baby boomers began to retire. The number of post-retirement and young workers—who are paid the least—has increased by 2.86 million. With so many people facing pay cuts of 50% or more, is it any wonder that income and spending for the total economy is falling?
The problem with demographic issues is that they take a long time to develop and a long time to resolve. I think the tsunami of low-wage, post-retirement workers will finally start to subside around 2025 or so.
Deflation is not a monetary issue but is, instead, based on demographics. Easy money and negative interest rates only make things worse. Set the 10-year peg at 1%—or, better yet, 3%—and watch older workers leave the workforce so they can live happily ever after on the return on their investments.
Then you will see wages and inflation rise.
Jeff Uscher
Jeff Uscher’s Japan Insider: http://www.japan-insider.com
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