This is the third post I’ve written recently about Japan’s economic policy of Abenomics. I figured I would revisit the topic due to two recent articles, one by the IMF and one by the WSJ, that analysis Abeconomics. Both of the articles illustrate the difficulty that Abenomics will have if wages do not rise. As I mentioned in earlier posts, unless there is an increase in wages, the economic growth that Japan has seen recently will slow down. According to the IMF paper, the average Japanese worker has been funding their consumption by dipping into savings. The savings rate, as a percentage of disposable income, in Japan has fallen from 5% to 0% todayThis means the most of Japan’s increased consumption is due to deficit spending, or spending more than the average worker is bringing in. This is a huge problem because worker’s savings are a finite number. This means that there is an upper limit on how high consumption can go. Eventually, consumption will hit a peak and then start dropping if wages don’t increase. Next years increase in consumption tax will place even higher pressures on consumers.
One reason that wages have failed to rise in the past few years is the increase in non-regular workers. Non-regular workers are paid less and have less incentive to invest their human capital into firms due to the belief that they’re part time. In the end, the firm is hurt by losing investments in human capital and production by hiring non-regular workers.
Abenomics “third arrow” is supposed to help solve the stagnation in wages. Unfortunately, there hasn’t been much success in this area. Japan’s government has used financial policy to try to increase wages with little success. The Japanese government has offered a tax break for companies who’s labor expenses increase by 2-5%. According to the WSJ article, the main reason why these polices aren’t helping is a lack of credibility among the Japanese government. Critics don’t believe that the BOJ can hit their target inflation rate of 2%. One of the few ways that the BOJ can reach the 2% target is another round of quantitative easing, even though critics claim this could lead to runaway inflation and a spike in interest rates. From what we’ve learned in 411 though, the BOJ’s quantitative easy will only lead to runaway inflation and a spike in interest rates if they make mistakes. I think the best thing that Japan can do to raise wages is to raise the minimum wage. Japan has the lowers minimum wage out of all OECD countries. A raise in the minimum wage would also lead to a decrease in non-regular workers, which would put upward pressure on wages and increase the efficient use of human capital by firms and an increase in productivity.