Real wages for June in Japan, announced on August 6, 2024, turned positive for the first year-on-year figure in 27 months. Real wages are calculated from the total cash wages paid to everyone, taking into account the effect of prices, and I believe that it is an indicator that is quite consistent with the way people actually live. The period during which real wages continued to fall was 26 months, from April 2022 to May 2024, which means that prices rose for more than two years, making life increasingly difficult for the Japanese people.
Now, it is a good thing that real wages turned positive in June, improving the difficult situation where real wages continue to decline from the previous year. So, will this lead to a steady recovery of the Japanese economy and make our lives easier? In this post, I would like to share with you some important points that will help you understand the outlook for the Japanese economy in the future.
Figure 1: Real and nominal wages and consumer price index (total excluding owner-occupied imputed rent) since January 2022
Source: Japan Ministry of Health, Labor and Welfare, "Monthly Labor Statistics" and Japan Ministry of Internal Affairs and Communications, "Consumer Price Index (2020 base)"
First, let's look at Figure 1 to understand how real wages are calculated. For 26 months, the blue line, real wages, remained negative for the entire period, while the orange line, nominal wages, remained positive for the entire period. In other words, Japanese salaries were rising properly. The reason why real wages kept falling is that consumer prices, indicated by the gray line, were rising faster than salary growth. If prices rise more than salary growth, real wages will fall; on the contrary, if prices fall more than salary growth, real wages will rise. So what can we expect in terms of real wages from next month onward? In conclusion, we cannot predict a very good outlook. Let me try to explain why.
Figure 2: Total Cash Salary and Regular Salary after January 2022
Source: Japan Ministry of Health, Labor and Welfare, "Monthly Labor Statistics"
Figure 2 shows the trends of "total cash salary" and "regular salary". "Total cash salary" is the total amount before income tax, social insurance, union dues, purchase price, etc. are deducted. It also includes bonuses, which are called "special salaries," and refers to the entire salary that we recognize as face value. This figure is published as the nominal wage. On the other hand, "regular salary" refers to salary paid in accordance with the conditions and calculation methods previously stipulated in labor contracts, collective bargaining agreements, or payroll regulations of the workplace, and includes "overtime salary. So-called overtime pay is included here, but the amount does not include bonuses.
Turning back to the graph, you can see that the two figures are generally linked, except for the month in which bonuses are generally paid, but you can understand that in June 2024, the two figures diverge significantly (nearly double). The reason for this is, of course, the bonus. The recent news of a record 940,000 yen in bonuses at a major company was reported, but this effect is transitory. In addition, due to the impact of the exchange rate, where the yen's depreciation, which at one point reached 160 yen to the dollar, has returned to the low 140s, it is unclear how much the July-September 2024 financial results will settle at, and how this will affect winter bonuses is also unpredictable.
Figure 3: Real Wages and Consumer Price Index (Composite excluding owner-occupied imputed rent) since 1991
Source: Japan Ministry of Health, Labor and Welfare, "Monthly Labor Statistics", and Japan Ministry of Internal Affairs and Communications, Consumer Price Index (2020 base)"
What about consumer prices, the other factor that determines real wages? Figure 3 shows the transition of both since 1991. Since the collapse of the bubble economy in the early 1990s, you can see that in phases when consumer prices, the orange line, have been rising, real wages, the blue line, have been negative almost without exception. As shown in the graph, there have been three previous instances of real wages falling for longer than 20 months. The points to be noted are indicated by the orange arrows.
It is important to point out that the past three times when the Japanese economy has emerged from a long-term decline in real wages, the consumer price index, which is the orange line, has always fallen and remained at a level that indicates a decline in prices from the previous year. However, what about the Consumer Price Index this time? The preliminary figure for June 2024 remains high at 3.3. The yen has been appreciating recently, and although the prices of crude oil and grains, which are the factors behind soaring prices, have calmed down compared to the past, there is a sufficient risk that they will soar again depending on the situation in the Middle East, where tensions are rising.
As described above, real wages, which have temporarily escaped from negative growth due to the effect of bonuses, may well turn negative again after the fall when this effect wears off. Additionally, the suspension of government subsidies for electricity and gas prices during the midsummer period when electricity consumption rises is another concern. The only positive factor is that the yen has strengthened against the U.S. dollar to the 140-yen level since the Nikkei Stock Average plunged, but there are still concerns about the rising price of rice due to a poor harvest and the price of crude oil, which could soar depending on the situation in the Middle East. You should not think that how you feel about your personal life has nothing to do with the future of the Japanese economy. In fact, the largest component of the Japanese economy's GDP is private-sector final spending, which is determined by your daily purchases.
In September, an important LDP （Liberal Democratic Party JAPAN）presidential election will be held to determine the leader of Japan. Before that, real wage data for July will be released in early September. We hope that everyone will pay close attention to the announcement, which will determine the course of Japan.
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Japan's real wages have been negative for 24 consecutive months, the longest on record.