Despite receiving a mandate to continue the Abenomics experiment, at least from the 35% of the electorate who could be bothered to vote, the government faces increasing pressure to get the economy back on track. The policies of boosting export income while raising demand at home are looking increasingly incompatible as the Yen continues to weaken. At the same time, inflation remains stubbornly low, with only key import commodity prices rising significantly.
As Japan celebrates the New Year and millions trek to shrines to pray for prosperity in the year ahead, new government data shows rising poverty levels. The 2013 Comprehensive Survey of Living Conditions released late last year shows that Japan’s relative poverty rate – the ratio of households with net annual income below a threshold of just ¥1.22 million (defined using OECD standards) – had risen to 16.1%. This is the highest level ever recorded, placing Japan fourth in terms of relative poverty after Mexico, Turkey and the USA. Given that ¥1.22 million is half the median income in Japan, itself barely enough to cover rising costs of food and utilities due to the cheaper Yen, these numbers suggest the real poverty ratio is much higher.
In the same report, the Ministry of Health, Labor and Welfare found that just under 60% of households faced financial challenges. This figure rises to 66% when the household includes children, reflecting the high cost of child-rearing, particularly nurseries, compared to the low salaries available to mothers returning to the workforce. Other household types that are struggling include the elderly, where nearly half fall below the poverty threshold, single mothers and the disabled.
This disturbing report came just a few weeks before it was announced that Japan’s household savings rate (savings divided by disposable income plus pension contributions) fell to -1.3% in 2013, the first time the figure has been negative since records began in 1955. The change is consistent with the ageing population, but the pace of change has increased as working households are also beginning to run down their savings due to rising prices of basic staples and essential utilities. Total household income, including salaries, interest and dividends, was ¥285.5 trillion last year, with individual consumption spending at ¥289.2 trillion, leaving a deficit of ¥3.7 trillion.
Both reports have been seized on by opponents of Abenomics as the latest signs of policy failure.
Abe has little to point to in response. Inflation remains stubbornly low and companies appear more than happy to ignore his desperate seeming calls for sustainable increases in wages and salaries. At most, firms are raising bonuses instead, a temporary sop. In 2014, average household monthly income and expenditure was lower most months (see Chart). The one area where Abenomics is succeeding is in weakening the Yen, boosting profits, although not sales volumes, for major exporters. The efficiency of Japan’s international companies (a report several years ago noted that Japanese exporters aimed to be profitable at ¥80 to US$1, so the current ¥120 is pure ambrosia for many) has helped push up the Nikkei, benefiting Japan’s investor classes and increasing consumption at the top end. Not surprisingly it was largely this segment that was willing to turn out to vote last month, allowing Abe’s experiment to continue and make them even wealthier.
The problem is that, as some leading economists point out, in the long-run the decimation of the middle class harms the wealthy too because the consumer economy, on which the wealth ultimately depends, cannot prosper. While profits and stock prices have risen, wages for most Japanese remain stagnant. As a result, the much prophesied return to inflation has floundered as demand has failed to rise. Initial reports suggest prices had risen in December by about 2.7% compared to 2013, but by only 0.7% after the effects of the April tax increase are factored out.
Companies are simply holding on to their recent gains. Many, particularly the more international firms, no longer view employees as part of the extended, corporate family and want to retain profits partly because they also don’t believe the Abe plan will work. Since Abe came to power, company cash reserves have risen by 12% to a record ¥233 trillion, as firms, like consumers, see more problems than solutions in the near future.
Unemployment is low, standing at just 3.5%. That’s a piece of good news, but the percentage of those working part-time or as casual employees has risen to a record 37% with all the lack of security and lower salary grade this implies.
So while companies and stock investors prosper, those middle and lower income households are suffering and the poverty and savings rate figures come as little surprise. Households are spending their savings to make up the shortfall caused by the increase in basic monthly costs, but consumption overall remains flat. The possibility of demand growth helping achieve the government’s goals looks to be increasingly remote.
In late December, in its latest attempt to boost domestic demand, the government announced a new ¥3.5 trillion stimulus package, adding to the country’s already enormous debt pile. Companies will benefit immediately given the inclusion of a measure to reduce corporation tax by 2.5% as an additional bonus. The package also includes ¥420 billion for hard pressed regional economies, most of which will take the form of shopping vouchers to be doled out by local authorities in a crude attempt to get people to spend – but at least more effective than giving it to banks.
While there’s stimulus, there may indeed be hope, but the abject failure to produce greater consumer confidence through higher wages over the past two years suggests that hope may be waning. On the other hand, three more years in power will make the wealthy that much wealthier, in the short-term at least.
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