TOKYO -- An unexpected decision by Japan's three largest financial groups not to raise base pay this year in light of negative interest rates is seen as a slap in the face of the government.
Prime Minister Shinzo Abe has been pushing companies to hike wages to stimulate the economy. He spoke at a meeting of his Liberal Democratic Party here Sunday, where one of the guests was Sadayuki Sakakibara, chairman of the powerful Japan Business Federation, or Keidanren.
"I want to thank you in advance," Abe jokingly told Sakakibara. The prime minister was referring to the spring labor-management wage talks, the bulk of whose results are due in Wednesday. This caused 3,500 attendees to burst into applause.
"I want to do all I can to ensure solid wage growth, continuing on from last year and the year before," Sakakibara replied. But the cozy relationship suggested by this exchange belied his mixed feelings on the matter.
Four months earlier, Sakakibara had cut short a business trip to China to attend a public-private dialogue at the prime minister's office. Abe asked him to lay out his stance on wage hikes at the next meeting, three weeks later.
Sakakibara was torn. While he considers wage decisions best left to the discretion of company management, the economy is flagging and the exit from deflation is not proceeding as hoped. He could not help but wonder if saying wage hikes were a no-go would actually please anyone or do the country any good.
"I hope to see wage growth that is higher than last year on an annual-income basis" was the Keidanren chairman's eventual answer. He carefully avoided referring to base pay hikes -- or companywide raises regardless of seniority -- while telling Abe what he wanted to hear.
Since its 2012 formation, the Abe government has engineered an economic recovery fueled by a weak yen and a stock market rally. It has leaned on businesses to raise employee wages, citing an earnings rebound driven by macroeconomic policy.
Two years ago, Akira Amari, then economic and fiscal policy minister and standard-bearer for the wage hike push, asked auto executives to raise base pay. "We've given you funding for it," he said, referring to the government's decision to drop a corporate tax surcharge to pay for post-disaster reconstruction a year ahead of schedule.
Similarly, the government and the ruling coalition now plan to bring the effective corporate tax rate under 30% a year early. But the environment looks completely different from the last two rounds of wage talks.
Hitachi, once a symbol of corporate Japan's revival, is struggling amid sluggish infrastructure demand in China. Operating profit is expected to decline for the first time in four years in the fiscal year ending March 31. "New projects aren't proceeding [in resource-producing countries] because of low oil prices, so we have no choice but to set aside reserves," said Toyoaki Nakamura, an executive vice president.
Pretax profit at 1,536 major listed companies is projected to rise just 2.3% this fiscal year, compared with initial forecasts indicating 8.7% growth, a Nikkei Inc. survey shows. The current situation is worse -- profits sank 3.9% on the year in the October-December quarter.
In a bid to allay industry worries about splurging on wage hikes even as earnings shrink, the Bank of Japan decided Jan. 29 to implement negative interest rates. The policy aimed to give the economy a shot in the arm by encouraging households and businesses to spend. But a miscalculation derailed this plan barely a month later.
In mid-February wage negotiations, megabank executives argued that with negative rates making it tougher to boost profits, the time was not right for across-the-board pay raises. The three banks decided Feb. 28 not to raise base pay this year.
"This is a revolt," a business leader said of this development.
The megabanks' mindset rippled out to the rest of the banking industry. At Bank of Yokohama, labor decided Monday to scrap its demand for higher base pay.
The government and the central bank are at a loss. An aide to Abe lamented this turn of events, noting that the negative-rate policy was designed to avoid weighing on financial institutions' profits.
The BOJ, which sees the spring wage talks as a crucial juncture in the battle against deflation and thus had pushed hard for base pay raises, has subtly changed its tune. Companies should also pay attention to hourly rates for part-timers, a top official said.
"The environment needed for wage growth is in place," Gov. Haruhiko Kuroda told reporters after Tuesday's monetary policy meeting. But saying this was the most he could do. The central bank's error in judgment reflects the dark clouds hanging over prospects for wage growth and an escape from deflation.