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Mar. 10, 2015 - Updated 04:16 UTC



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Getting Abenomics Back on Track

Yuko Fukushima

Mar. 8, 2016

It’s been more than 3 years since Shinzo Abe became prime minister, but a stable path to economic growth remains elusive. Part of the problem is stagnant wages.

The latest GDP figures, for the October-to-December quarter, have been revised to minus 1.1%.

The Japanese economy has seen contractions in a number of quarters over the past 3 years. That's despite the government trying to pull the country out of deflation through a set of economic policies dubbed Abenomics, which aims to create a virtuous cycle.

First, the Bank of Japan implemented monetary easing. This increased the amount of money circulating in the market, meaning the relative value of the yen fell against other currencies.

The weaker yen boosted not only exports, but also the profits of major Japanese companies, because their earnings abroad represented more in yen terms.

This part of the plan worked, and Japanese companies enjoyed greater profits.

But the other important premise of Abenomics was that such businesses would then increase wages. The idea was that if workers earned more, they would also spend more.

And that increased consumption would in turn lead to better earnings for companies, completing the virtuous cycle.

Unfortunately, the cycle froze after corporations profited from the weaker yen. Data shows company profits have surged 30% since Abe became prime minister.

In the meantime, labor costs fluctuated but in the end, the amount of money that goes to employees remained practically flat.

That's one of the major reasons why consumption failed to pick up as planned.

Since the financial crisis in 2008, many Japanese companies have been looking for ways to reduce costs. At about the same time, the labor law changed, making it easier for firms to hire people on different types of contracts.

Workers in Japan can be largely divided into two groups: regular and non-regular employees. One major difference between these categories is wages.

Wages for regular employees increase based on how long they've worked for the company. But non-regular workers essentially don't get a raise. Nor do they receive bonuses or benefits regular employees are entitled to. So the older they get, the greater the wage gap.

Under this 2-tier system, companies tend to hire non-regular workers because they cost less and their contracts can be terminated more easily.

As a result, the proportion of non-regular workers has been increasing. They now make up 40% of the workforce.

About 70% of non-regular workers are women, so organizers of a recent job fair put out a call to women who want to be hired as regular employees. They accepted reservations for 350 places -- and the event was fully booked.

Many of the job seekers have no extra money to spend.

"I can barely afford to pay for rent and food," one women at the event said.

"When I think about my savings and paying student loans, I know the future will be tough if I stay in this position," said another.

Candidates attended 5 interviews on average because they know their chances of landing a regular job are relatively low. Competition was tough, particularly for those with limited work experience.

Only one out of 4 applicants is able to land a clerical position with regular status.

"Many participants are looking for a clerical job that comes with a regular contract," said Yasushi Numayama, a manager at En-japan. "But most companies won't give regular status to someone with no experience."

The prospects of securing a better position are dim, meaning workers are unlikely to spend more, and revive the Japanese economy.

The opposition's Democratic Party has been urging the government to reduce the wage gap. So Abe has responded with a set of measures to increase the compensation of non-regular workers.

"The government will lay out this year a plan to ensure there's equal pay for equal work," Abe said on Jan. 22.

The government is hoping to eliminate the gap between regular and non-regular employees by raising the wages for non-regular work. Officials hope this will boost consumer spending and stimulate economic growth.

Yuichiro Mizumachi has been advising the government as an expert on labor law. He's pushing for the unification of separate legislation on regular and non-regular employment.

He said the law should require companies to treat all employees equally unless they have a legitimate reason not to do so.

"From a legal point of view, the idea is to switch the burden of proof to the companies. By doing this, the government would push firms to create a fair wage system, that also covers bonuses and benefits," Mizumachi said. "This means that if a company cannot justify a wage gap among employees, it will be under pressure to fix it."

But Mizumachi said reducing the gap between regular and non-regular employees is not enough.

"If economic growth and productivity don't rise in step with higher wages, companies will simply face higher costs. So in the long run, both regular and non-regular employees could see their pay decrease, even if it has become more equal," he said.

Another labor expert has a different view. Hisashi Yamada said the government should focus on helping workers get the qualifications they need to transfer to more dynamic sectors of the economy.

"Companies have to constantly evolve in step with the times. When their business model changes, they obviously require employees with different skills sets and qualifications," Yamada said. "The government needs to respond by setting up training and certification programs for working adults."

Analysts agree the government's plan to reduce the gap between workers is a step forward. The question now is, what measures beyond ensuring equal pay for equal work can officials come up with to increase wages?

That will be the key to complete the Abenomics cycle, and to revive Japan's economy.