Capped wages recipe for more growth

Capped wages recipe for more growth

Nikkei, Jan 8 2006

Mature economy will keep expanding, but slower rate will challenge marketers

SHOGO IMOTO
Senior staff writer

As symbolized by the boom in yoga, consumers are pursuing slower lives amid the nation’s crawling economic growth and their flat wages.

Many people remain unable to perceive any benefits from the ongoing economic expansion, which in November surpassed the 57-month Izanagi Boom to become the longest expansion since the end of World War II.

In fact, personal consumption is still weak. Data shows that same-store sales at department stores and supermarkets have continued to come in below year-earlier levels.

Many people wonder how much longer the current boom can last. But looking at the long period of growth from a different viewpoint shows that the low-growth phenomenon – and many are describing the expansion as “hard to feel” – is responsible for keeping the ball rolling. And that it should continue to do so.

During the Izanagi Boom, which began in November 1965, the economy expanded at an annualized 11.5% in real terms.

In contrast, the real growth rate over the past four years and 10 months through November 2006 registered an annualized 2.4%.

In addition, the economy grew nearly 18% nominally on an annual basis during the 1960s, when product prices were on the rise.

In those days, wages increased significantly, which helped prompt the spread of color television sets and automobiles.

Today’s economy, still struggling to shake off deflation, is expanding at a nominal 0.5% rate. These numbers indicate that, if workers feel like they are not really benefiting from the economic expansion, it is because there is little from which to benefit.

So what is behind the expansion’s stamina? Yutaka Harada, chief economist at Daiwa Institute of Research thinks what is “supporting the recovery is the fact that wages have remained capped.”

Strained by their heavy burdens of labor costs during the deflationary period that began in the 1990s, companies rushed to restructure.

But real wages did not move lower until 2001-02, when their efforts to limit the number of full-time employees and hire more part-time workers finally began producing results.

In line with falling wages, labor productivity started improving. This trend has set the stage for companies to generate more profits only if they employ more people. An increase in exports as well as capital investment combined to help create employment, while forcing employees to put in more overtime.

Harada estimates that the labor input index improved an average of 0.7% each year from 2003 through the first half of 2006, after declining 0.8% between 1991-2003.

The labor input index is calculated by multiplying the regular employment index by the actual labor hours index, both of which are from the Ministry of Health, Labor and Welfare’s monthly labor survey.

The improvement contributed to lifting the real-term GDP growth rate to 2.4% from 1%.

Workers see this upturn as the result of their efforts to cover their stagnant salaries with overtime work.

The number of double-income families has also increased. In fact, extra income from overtime hours and a second paycheck has helped boost overall household income, putting consumption on course for growth.

But as long as wage hikes remain limited, personal spending will be unable to pick up steam.

Furthermore, with Japan’s population rapidly shrinking and aging, it will be difficult to find ways to significantly drive consumption.

Unlike the Izanagi Boom, which lit a fire under individual consumption, the present economy has reached a saturation point, in which consumers who already have houses, cars and various home appliances have little enthusiasm for buying new things.

Meanwhile, companies are reluctant to raise wages; they are more concerned with using their resources to lift their stock prices to mitigate any risk of becoming targets of corporate buyouts. The cutthroat nature of global competition is also forcing companies to hold costs down.

There is a bright sign pointing to the future: The ratio of job offers to seekers has stayed above 1 since late last year, and the gradually tightening labor supply is causing an increasing number of firms to recruit more new graduates and promote part-time employees to full-time status.

The traditional idea that stable, long-term employment is the backbone of corporate activities is returning to companies who have become aware of the disadvantages of their excessive merit-based pay systems.

Accordingly, an ideal scenario would be for the economy to continue its mildly paced and intangible expansion, with wages and employment gradually turning for the better.

The nation’s mature economy may not appear powerful but could sustain a moderate pace of consumption. Under the circumstances, consumers tend to pursue slow-lifestyle-oriented spending.

What companies should do now is assemble sales strategies based on this scenario

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