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Japan plans to raise minimum wage again in stimulus package

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 23, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - At a meeting of the government's top advisory panel today the Japanese Economics Minister Akira Amari presented the draft of stimulus measures. The draft includes reform measures that analysts believe is the need of the hour to pull the Japanese economy out of recession. The economy slid into technical recession with registering negative GDP growth in the third quarter. Japan slipped into recession for the second time since PM Abe entered office in December 2012. The aggressive easing policy could not produce the desired results thus far forcing the BOJ to push back the time by which it expected to achieve its inflation target. The government will thus have to do more to foster durable growth.

    PM Abe had asked Economy Minister Akira Amari to chart measures to help achieve Abe’s goal of expanding Japan’s nominal GDP by 20 per cent to 600 trillion yen over five years.

    Abe’s government plans to raise minimum wages to boost spending

    Raising wages is extremely crucial at this stage as it will help to increase spending. More disposable income will lead people to spend more thereby boosting demand. Only then can the economy gradually move out of 15 years of deflation.

    Japan's government plans to raise the minimum wage and wages paid to other workers with an objective to raise their nominal gross domestic product to 600 trillion yen in five years. The Nikkei newspaper today mentioned that the government would raise minimum wages by 3 per cent. The draft, as seen by Reuters however did not specifically mention the percentage increase in minimum wages planned by the government.

    To boost spending and gradually steer the economy towards achieving the 2 per cent inflation target, the government also plans to offer financial support to people living off their pensions.

    Government to encourage capital spending

    Abe advocated for reflationary policies to boost corporate profits. The draft showed that the Government plans to initiate steps to encourage capital expenditure. It plans to reward companies that invest in plants and equipment that improve energy efficiency. The government will also provide a timeframe for lowering the corporate tax rate below 30%.

    The companies have been asking for bigger corporate tax cuts even after the government agreed to lower the corporate tax rate to around 31 per cent next fiscal year.

    Raising wages cannot be expected to do much for the ailing economy

    Some economists are not convinced that raising wages will help to address stagnation concerns as they feel Japan's rigid labour market and low worker productivity will continue to plague the economy.

    The national average of Japan's minimum wage was at 780 yen ($6.33) per hour in the last fiscal year as well. It thus seems unlikely that a 3 per cent will do much for a stagnant economy. The road ahead for Abe’s government is thus far from easy.

    Despite minimum wage rising for the past few year Japan's rates are only slightly above the average for OECD members. Labour unions have also presented their case demanding higher wages.

    Raising wages alone cannot help policy makers undertake the daunting task of wading off deflationary pressures. Japan, like the euro zone, UK and U.S. is struggling to raise demands and bring about growth. That will happen when there is more money in the system. Boosting income is one way of addressing the problem. The other measure is to slash interest rates. Like the ECB, the Bank of Japan can consider cutting their lending rates into the negative territory.

    BOJ Governor Haruhiko Kuroda has in the past downplayed the need for fresh policy stimulus despite declining growth. BOJ had held rates when it met on 30th October despite little progress made by the BOJ in the direction of spurring inflation. The central bank kept its economic assessment unchanged at its last meeting as well.
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