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Monday, Feb. 7, 2011
End of 'dam theory' means Japan badly needs paradigm shift
Special to The Japan Times
This year's annual "shunto" labor-management wage talks appear to be proceeding on a subdued note. There can be three major reasons why.
One is that Japan's official unemployment rate has topped 5 percent for three years in a row. This is still much lower than the United States and much of Europe, where official rates are hovering at around 10 percent on average. But given that globalization is likely to accelerate the amalgamation and standardization of the world's economies, our unemployment rate has room to grow. Cheap labor remains abundant in many other Asian economies.
Another reason is that even though we often deplore deflation in Japan, our prices remain high by international comparison. If you were to view the prices of daily necessities from the U.S. and South Korea, for example, on a scale with Japan representing 100, an egg would stand at 76.9 in the U.S. and 71.2 in South Korea, a liter of milk at 39.7 in the U.S. and 64.3 in South Korea, and 1 kg of beef would be 45.5 in the U.S. and 98 in South Korea.
Exchange rate fluctuations heavily affect these comparisons. Yen appreciation hurts the profits of export-led firms, but a strong yen can be a blessing for households where rising incomes are not expected. This appears to be one reason why South Korea aggressively pursues free-trade agreements. Commodities, housing and land are all much higher in Japan than almost anywhere else.
The decline of prices in Japan is being driven by a global market-balancing mechanism, and there are limits to what the Bank of Japan's zero-interest-rate policy can do to reverse the trend.
On the contrary, the excess liquidity being generated by the advanced economies has found its way into international commodity markets where, in combination with the expansion in real demand in developing countries, it is pushing up prices for many commodities, fueling the risk of speculation-driven volatility.
The third issue is that the "dam theory" — which played a familiar role in Japan's postwar economic miracle — is no longer working. According to the theory, an increase in corporate earnings will lead to higher wages for workers, just like water in a dam must eventually be released to go downstream. This is no longer the case today.
In Japan, company profits have nearly returned to their pre-Lehman Brothers levels but the labor distribution rate has declined. In other words, the water accumulating in the dam is not trickling downstream.
This is because companies are increasingly reliant on overseas profits and — given the high corporate tax rates in Japan — are keeping their earnings based in local currencies in preparation for further expansion abroad. Behind the increase in overseas production, of course, is the high cost structure in Japan.
Workers have seen a slight pickup in wages recently, but this mainly reflects compensation for increasing amounts of overtime. Many salaried workers continue to work overtime without pay, leaving them little family time.
The collapse of the dam theory thus means that the BOJ's zero-interest-rate policy and pursuit of yen depreciation are no longer justifiable. What we need is a policy shift from emphasizing corporate profits to emphasizing consumer interests.
Of course, generous government spending is impossible. Our fiscal policy has nearly reached its limits, as credit-rating agency S&P reminded us by downgrading Japanese government bonds last month.
With the divided Diet open for business and the fiscal 2011 budget and the Trans-Pacific Partnership Agreement on the agenda, the purpose of "the Heisei era opening of Japan" advocated by Prime Minister Naoto Kan should be to increase the real purchasing power of Japanese workers, whose wages are unlikely to rise until the process of international standardization runs its course.
We need to realize that Japan's prices remain high by international comparison and that the long-cherished dam theory is broken, and push lawmakers to discuss structural reforms that can withstand the impact of globalization.
Teruhiko Mano is an international economic analyst.