Japan’s new govt’s job plan could do more harm than good

Japan’s new govt’s job plan could do more harm than good

Tokyo: Plans by Japan’s new government to raise the minimum wage by 40% and ban manufacturers from hiring temporary workers could push the record jobless rate higher, stifling an already tepid economic recovery.

The policy manifesto of the Democratic Party of Japan, which swept to power last month, calls for the minimum wage to rise to ¥1,000 ($11) an hour from about ¥700 over four years. That could raise annual costs for Japanese firms by 1.6%, or ¥3.4 trillion, Nomura Securities said.

While that percentage increase might not appear much, it will squeeze manufacturers after pretax profits excluding one-off items more than halved to ¥7.2 trillion in the year to the April-June quarter. Especially hard hit could be the small firms that employ seven out of every 10 Japanese workers.

More jobless workers, combined with falling wages and weak demand, bode ill for an economy barely out of its longest postwar recession and could complicate Prime Minister Yukio Hatoyama’s aim to put more money into the hands of households.

“The Democrats want to help boost personal consumption by raising minimum wages, which may be the right policy," said Hisashi Yamada, an economist at the Japan Research Institute. “But a prerequisite for such a plan is an economic recovery. The problem is that the Democrats have not shown how they will pursue growth by promoting new industries and industrial realignment."

If companies try to slash costs solely through job cuts, it would force 650,000 employees out of work, Nomura Securities estimates. That would mean a 1 percentage point rise in the jobless rate from a record 5.7% in July.

“I doubt if minimum wage hikes could help stabilise workers’ livelihoods," said Takahide Kiuchi, chief economist at Nomura.

“If companies saddled with more labour costs accelerate the pace of cutting workers, the job situation would further worsen."

Falling wages

The Democrats have pledged to turn Japan’s export-driven economy into one led by consumption, using the ¥300 per hour hike in minimum wages to spur spending.

Critics point out that companies have little room for flexibility given tough competition—minimum wages are expected to rise just ¥10 on average to ¥713 per hour this year, having risen only ¥200 in the past two decades.

Even in the last growth cycle from 2002 to 2007, when Japanese firms posted record profits as exports surged, wages shrank 0.8% on average, weighing on consumption.

While some European countries such as Britain have raised minimum wages without causing a jump in the jobless rate, that was when times were good, Yamada said.

Illustrating the plight of Japanese workers, average annual household income had fallen 16% by 2007 from a peak in 1994, as companies tended to hire workers on a temporary rather than permanent basis. Temporary workers are less expensive to hire and relatively easy to fire, unlike full-time employees.

Many Japanese workers, including 230,000 temporary workers, have lost their jobs since the collapse of Lehman Brothers last September tipped the world into recession.

That prompted the Democrats to propose a ban on the use of temporary workers in the hardest-hit manufacturing sector.

Such a ban would hurt the electronics sector more than Japan’s big automakers because it has less room to absorb higher labour costs, Yamada said.

Meanwhile, many companies, saddled with excess workers and capacity, cannot afford to boost wages. If they do so they would simply stop hiring or shift production overseas, analysts say.

“The DPJ’s plan could lead to the deterioration of profits and productivity at Japanese manufacturers," said Seiji Shiraishi, chief economist at HSBC Securities Japan. “It may raise the risk of pushing the economy into a deflationary spiral."

Japan’s jobless rate is far below the 9.7% recorded in the United States in August and 9.5% in the euro zone in July.

But the jobless rate is potentially near those levels when taking into account some 2.5 million workers employed on state subsidies and so-called “discouraged" workers who have given up looking for jobs, totalling 1.6 million, some analysts say.

“The actual jobless rate may not rise that high. But such a risk could arise if Japan’s economy suffers a double dip (recession) next year," said Taro Saito, a senior economist at NLI Research Institute.

“Chances of that happening depend largely on how the US economy recovers and how the new government implements its policy steps."