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Productivity reform essential to the wage growth Abe seeks

Making workers feel more prosperous is among prime minister's top challenges

Government and business leaders talk wage growth at the Council on Economic and Fiscal Policy meeting at the prime minister's office Oct. 26.

TOKYO -- Prime Minister Shinzo Abe has asked Japan's chief executives to help consumers feel richer by hiking wages 3% in the coming year. But real action on labor reform must go beyond a simple request to ensure that companies feel comfortable enough to comply.

In the medium to long term, the Abe government aims to get Japan's economy growing 2% annually in real terms, and 3% or more on a nominal basis. Companies' role is to put more money in consumers' pockets in the form of higher wages, helping tie rising prices to a broad economic recovery. "Society demands" action, Abe told government and business leaders Thursday at a meeting of his Council on Economic and Fiscal Policy.

Employers have been reluctant to open their purse strings of late: Wages have grown only around 2% annually for the past several years. At the end of fiscal 2015, companies held more in cash and deposits than they paid out in wages during the fiscal year, and that gap only grew wider in fiscal 2016.

But now, with Japan's labor shortage deepening, wage hikes are growing more attractive to many in the business sector. Sadayuki Sakakibara, chairman of Keidanren, or the Japan Business Federation, said the group hopes to "give positive consideration" to supporting an increase.

In response to Abe's request for a 3% hike, a representative of the convenience store operator Lawson said the company expects wage increases "will help energize consumption." Yasuo Nakatani, CEO of Hitachi Transport System, said the freight forwarder is "trying to increase wages at logistics operations" in light of the severe labor shortage in that industry. "If we don't, we won't be able to secure workers."

Wrong goals

"A policy push on all fronts," including an ambitious budget, tax incentives and regulatory reform, will help this process along, Abe said. The government is considering extending and expanding tax breaks for companies that raise wages a certain amount; the breaks are currently set to expire at the end of fiscal 2017.

At present, large companies raising pay 2% or more can deduct up to 12% of the total amount of the increase on their corporate income taxes. Smaller enterprises can deduct up to 22% of the increase. The government proposal would tighten requirements, such as by requiring a larger pay hike, while also increasing the amount companies can deduct.

But a one-size-fits-all wage hike target may not be the way to go, given differences in profitability and labor shortages among industries. Keidanren's Sakakibara said the organization would consider "each company's earnings situation" when weighing Abe's request for a 3% hike.

The key to making substantial wage hikes sustainable is maximizing labor productivity -- the amount of added value each worker creates. An essential first step is evaluating workers on their performance, rather than the time they work. Pursuing a 3% hike across the board could stand in the way of this goal.

The government is weighing tax breaks for companies that expand employee education programs such as training trips abroad -- another key piece of the productivity puzzle. But more needs to be done to direct human resources into emerging growth sectors as well. In 26 countries, including Japan, the U.S. and European nations, that have overhauled worker protection regulations, labor productivity averaged 0.8% higher three years after the changes were made.

Time for action

Abe's eagerness -- or anxiousness -- to set wages rising by fiat is understandable: Many in Japan feel that real improvement in their standard of living is elusive despite broader economic growth, raising doubts about how Abenomics is working. For five years running, the prime minister has asked companies to increase wages by at least as much as the year prior. Yet during wage negotiations in the spring of 2017, overall wages rose by just 1.98%, according to the Japanese Trade Union Confederation, the nation's largest labor organization also known as Rengo. This is less than the 2016 figure, which in turn was a drop from 2015.

Hence Abe's 3% target -- the first explicit numerical goal for pay increases the leader has put forth. If companies were to comply, wages would rise in real as well as nominal terms, according to a Cabinet Office official.

Failing to get Abenomics on track could have severe political consequences. On the surface, Abe's mandate appears strong following Sunday's lower-house Diet election, in which his ruling Liberal Democratic Party and junior coalition partner Komeito retained their two-thirds supermajority. But in an opinion poll conducted Oct. 17 through Oct. 19, 47% of respondents voiced disapproval of the job Abe's cabinet was doing, compared to just 38% who approved. Unless that figure rises, Abe could face resistance when he pursues a third term as LDP chief next September.

The ruling bloc has been slow to act on key labor market reforms including performance-based pay for white-collar workers, which remains stalled in the Diet, and a policy that would let employers found guilty of unjustly dismissing workers settle the matter with a cash payment. While a substantial wage hike would certainly help the public feel more prosperous as prices rise, companies are unlikely to comply until they feel conditions are right.


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