Land of No Pay-Hike

By Ichiro Suzuki Per capita GDP for Japanese has been stagnant for over a generation. The latest statistics by the IMF ranks Japan No.24 with $42,928. This number has not changed materially since the early 1990s when Japan was considered as the wealthiest on earth (except for a few tiny European states). By 2020, Japan ranks 6th in the G-7 countries with only Italy behind it with $34,997. While Japan’s income level at the outset of the 1990s was considerably stretched by excesses of the 1980s Japan bubble, it is still stunning that it has failed to grow noticeably over a generation. It is worth revisiting the path the country has followed over the last few decades to reach where it is. 1. Failing to adapt to post-industrial society Coming of the end of the Industrial Age was already debated in the 1970s, when the Japanese economy’s super normal growth was hit by double whammies of surging of its currency and crude oil prices. Despite correctly anticipating the change, Japan never adapted its economic structure sufficiently to the post-manufacturing world. While Japan continues to hold onto manufacturing industries, two mega shocks hit the industries. One was the rise of the Asian Tigers. Taking advantage of their low costs, Far Eastern countries launched their assault on Japan in industries that brought prosperity to the country. Their emergence squeezed wages in Japan, but the Tigers became more than low-cost competitors. Look at the Taiwanese semiconductor industry. It overtook Japan in the 1990s in chip manufacturing and has left the former forerunner far behind in the 21st century. Almost all the tech giants around the world depend on Taiwan Semiconductors (TSMC) for manufacturing of their chips. Another shock for Japan was the advent of the internet in the 1990s. The digital age has shifted the electronics industry from hardware to software, making the industry less focused on manufacturing on which Japan has thrived. The country simply was not able to keep up with the change.

2. Deflation The burst of the infamous Japan Bubble at the outset of the 1990s brought the Japanese economy the age of zero growth and zero inflation, and sometimes something worse than that. The bubble’s collapse took the banking system down exerting downward pressure on prices. The yen saw its meteoritic rise in the first half of the 1990s despite the economy was going through the post-bubble slump and manufacturers were already losing competitiveness. Corporate Japan repatriated financial resources that had been parked overseas, in order to reconstruct balance sheets that were damaged by the burst of the bubble and an ensuing recession, thus driving up the value of the yen. A surging currency amid a severe economic slump has left deep scars in the economy, considerably downshifting inflationary expectations. In order to save as many jobs as possible, labor and management made a pact of work-sharing at the sacrifice of wage hikes. For those who were not so unlucky to lose jobs, their wages and salaries would never rise. This expectation of ‘zero pay hike’ got firmly engraved in the minds of Japanese workers. Pay would not rise forever and ever. Period. Outside of manufacturing industries, pays in financial services industries took a big hit. This was a correction of inflated salaries and bonuses through the end of the 1980s. An economic rent caused by tight regulations and, of course, the bubble was taken out of the market. Deregulation of the industry and the collapse of the bubble brought down banks’ profits considerably, taking salaries and bonuses with it. Without skills to compete in the jungle of the global markets, their pay packages stayed stagnant for years to come.

3. Status-quo bias Effects of aging of population, on which Japan has been ahead of the curve, began to emerge in the 1990s. Voters grew older and the old age group went to the ballot box a great deal more often than younger people. This group tends to vote for maintaining the system with which they had lived through. That was the system they are familiar with and it brought them and the country prosperity. They were the beneficiaries of the Japanese economy’s super normal growth. Why would they want a change? Younger generations’ wish for a change of the system has never got satisfactory responses. In recent years, income of South Korea has experienced a meteoric rise, overcoming the devastation caused by the 1997-98 Asian financial crisis. South Korea is ranked in the 26th place by the IMF with $34,866. As the rise of Samsung shows, some South Korean industries have made spectacular leaps in recent decades. There is a reasonable chance that South Korea overtakes Japan in the foreseeable future. While the vast majority of Japanese has been indifferent to relative impoverishment of themselves, having become ‘poorer’ than South Korea, could wake them up at last. Some might take it beneath their dignity. If it still fails to wake them up, Japan remains stuck at where it is indefinitely.


About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.