Published in The Financial Times 6/12/2013
For anyone with memories of the UK in the 1970s, observing Abenomics in action is like a taking a trip through the looking-glass.
Instead of reining in credit growth, Japanese policy-makers are trying to prod borrowers and lenders out of their torpor. Rather than preventing capital flight through exchange controls, Team Abe is pressing for big increases in overseas investment by Japan’s Godzilla-sized public pension fund. And far from clamping down on demands for higher wages, it is actively encouraging them.
In the 1970s, British prime ministers would invite union leaders and heads of industry to Number 10 Downing Street in order to thrash out wage deals over beer and sandwiches. Prime Minister Abe has yet to invite Japan’s equivalents to sushi and sake at his official residence, but he has let it be known that the government wants to see higher wages next year.
The political calculus is clear. Blue chip exporters quickly benefitted from Abenomics, as quantitative easing Japan-style drove the yen lower. With the Nikkei Index at the highest level in dollars since the turn of the century, the financial sector has done well too. Ordinary workers, however, have not been invited to the party. Employment income hasn’t risen, so the rise in energy prices has meant declining living standards. Worse, the government has decided to squeeze purchasing power further by hiking the value added tax next April.
Mr. Abe depends on public support to push through his programme. His polling numbers are unprecedentedly high for a Japanese prime minister after one year in office, and the Chinese leadership appears to be doing its best to keep them there. Even so, there are limits to the public’s patience. Stagnant wages and rising prices are not what Japanese voters had in mind when they handed Mr. Abe his landslide victory in December 2012. Hence the angst about the outcome of next year’s shunto wage negotiations.
Shunto literally means “spring struggle”, but there has been precious little aggression from the (mainly company-specific) unions during Japan’s long deflationary winter. Employment income, like many economic indicators, is no higher now than in the early 1990s. Changing such a deeply ingrained trend won’t be easy. Large listed companies may be racking up record profits, but the small and medium enterprises that employ two thirds of the Japanese work force are not prospering on the same scale.
The problem is not just political. The core concept of Abenomics is the conquest of deflation as exemplified by the central bank’s conversion to aggressive quantitative easing. Currently inflationary expectations for the next ten years – as measured by the yield gap between inflation-protected and ordinary bonds – are around 0.5%, minus the upcoming VAT hike. That’s the highest in a good while, but still a far cry from the target of 2% in two years.
Some members of the Band of Japan’s monetary affairs committee are questioning the bullish outlook. They are right to do so. The BoJ must and almost certainly will do more – perhaps by ramping up the purchase of Topix ETFs (exchange traded funds).
Ultimately, though, wages are the key to sustained reflation. Fortunately some bright spots are appearing. The job-offer-to-applicant ratio is nearing parity. Some lower-paid workers are already doing better. According to the Recruit employment agency, hourly rates for the part-timers who wash dishes and wait tables in Tokyo restaurants are up 1.7% on the year.
How can this be? In much of the developed world the picture is of slack labour markets, cowed workers and graduate unemployment. The answer is that there are structural forces in favour of higher wages in Japan. Demographic shrinkage means that the cohort entering the labour market is getting smaller year by year. Unlike many other developed countries, Japan has not sought to defer the consequences through mass immigration. Employers will simply have to pay up.
Ironically these very issues are often cited as causes for despair about Japan’s future. In the short-term they are working for the reflationary cause. Longer term, it’s just possible that higher wages could lead to more investment in skills and better use of human resources. By today’s conventional wisdom, that would be another trip through the Japanese looking-glass.
The UK’s beer-and-sandwiches approach to incomes policy never had a prayer, given the super- stimulatory macro settings of the times. In Japan’s case, Mr. Abe’s moral suasion is in synch with monetary policy and over time the labour market should work in his favour too.