MHLW and the Nikkei on Wages and Profits

August 5, 2007
By Ken Worsley

On Tuesday, the Ministry of Health, Labor and Welfare announced that in June, average wages had fallen yet again in Japan, marking the seventh consecutive month of decline. The Ministry’s study found that average monthly total cash earnings per regular employee in June 2007 were down by 1.1%, and stood at 465,174 yen. On the other hand, Contractual cash earnings were down by 0.1% at 270,990 yen, and scheduled cash earnings were down by 0.1% at 251,763 yen.

Summer bonuses were part of June’s pay packet at most firms in Japan, which explains why regular employees received so much more in cash than their scheduled earnings would have led one to expect.

While there are very solid demographic reasons why average wages are declining, let’s put that off for now. On Friday of last week, the Ministry published the results of its report into establishing a “Work-Life Balance” in Japan. Although the survey has not yet been published in English (and most likely won’t be - MHLW does not translate much aside from the essential reports), it’s essential thrust was to recommend that companies do more to share profits with their employees (nothing about the shareholders) by raising wages (nothing about dividends). The report holds the line that wages have not increased in real terms since 2000 (in truth, they did last year, but those gains have been wiped out by the past seven months of declining wages).

Again, hold off on the demographics. Just this morning, the Nikkei published the results of its survey into corporate profits at Japanese firms for the first quarter of the new fiscal year:

Combined pretax profit at listed firms increased 19.5% year on year in the April-June period, fueled by booming demand in emerging economies and the weak yen.

19.5% - that’s solid. Of course, without sitting down and doing an absolute ton of number crunching, it would be hard to tell how much of that pretax profit comes from the forex bonanza, and how much of it would be wiped out if the yen were to return to the level that it supposedly “should be” at (Nobuo Yamaguchi, chairman of the Japan Chamber of Commerce and Industry, believes the yen should be at 115 to the dollar). Nonetheless, the Nikkei expects big numbers to continue until the year’s end: “Listed companies are forecast to post their highest-ever combined profit for fiscal 2007, marking the fifth-straight record high.”

It’s worth noting that the Nikkei’s survey accounts for about 60% of publicly traded firms, and excludes both financial institutions and start-ups. More people in Japan work at small and medium size enterprises than large firms.

Of course, the Nikkei is quick to point out the downside: “The outlooks for the U.S. economy and foreign exchange rates remain risk factors.”

I would also argue that poor risk management also remains a risk factor. However, aside from the demographics (which we’ll get to later), we see another picture emerging. Gains in wages are still much, much harder to erase in Japan than in other nations. The currency risks seem large enough, especially when a certain percentage of profit is dependent upon overseas consumption, to prevent companies from raising wages in any significant way. Three difficult quarters overseas (a recession) would destabilize many firms in a hurry, and one thing Japanese firms learned about cost-cutting in the 90s was that it’s virtually impossible to cut wages unless a firm either: 1) Goes bankrupt, or 2) Waits for its regular, salaried workers to retire and instead of replacing them, hires contract workers at lower wages (they don’t get bonuses, for one).

That brings us into the demographics. We’ve been writing about it quite a bit here over the past few months, but for a closer look, I would recommend this post over at Shisaku, which points out:

1) the unemployment rate is dropping and now stands at 3.7%

2) the number of non-Japanese working in Japan, particularly in the service industries, is at its highest level ever

3) the number of recent high school and college grads who have found work is returning to historical norms

4) the wages of the underemployed 30-40 year olds (”the lost generation”) are below historical trend lines

5) the number of people leaving the workforce through retirement (the highest paid workers) is soaring

I would add to that:

6) the number of people ‘retiring’ from full-time salaried positions because company rules stipulate that they much at an arbitrary age (60 or 65), then going back to work at a fraction of their wages at the same companies as contract workers, is also surging.

Filed Under Labor and Wages