Japan's Wages Drop for First Time This Year on Profit

By Toru Fujioka

July 31 (Bloomberg) -- Japan's wages dropped for the first time this year, indicating that slower consumer spending coupled with falling exports may push the economy into a recession.

Monthly wages, including overtime and bonuses, decreased 0.6 percent in June from a year earlier to 463,013 yen ($4,294), the Labor Ministry said in Tokyo today. Bonuses fell 1.5 percent, the biggest drop since December.

Falling wages may further depress consumer confidence already at the lowest level in more than 26 years, at a time when higher costs for food and gasoline already have people reluctant to spend. Economists say the economy probably contracted last quarter after reports in the past week showed exports, production and household spending declined.

``Japan is probably in a recession as consumer spending can't cushion the impact of slowing exports and production,'' said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. ``Wage growth will remain weak.''

The yen traded at 107.99 per dollar at 12:10 p.m. in Tokyo from 108.07 before the report was published.

Japan's economy probably contracted at an annual 0.5 percent rate in the second quarter, according to economists surveyed by Bloomberg this month. The Cabinet Office is scheduled to release gross domestic product figures on Aug. 13.

``The economy is unstable and consumer spending will continue to be sluggish as weak global demand affects exports and production,'' said Masamichi Adachi, senior economist at JPMorgan Securities Co. in Tokyo.

Main Drag

Bonuses, which usually amount to several months of pay and are often used to purchase durable goods, were the main drag on wages. The lump sums are typically paid in June and December.

Prices of most frequently purchased goods rose 4.2 percent in June, prompting households to reduce spending for a fourth month. Sales at department stores dropped 7.6 percent, the fastest pace in a decade, because of rising prices of daily necessities, according to the Japan Department Store Association.

``Households' spending power is deteriorating rapidly,'' said Hiroshi Rinno, chief executive officer of Credit Saison Co., a Tokyo-based credit-card company. ``It's a tough situation for us.''

Tepid wage growth means the Bank of Japan will focus on sustaining growth rather than tackling inflation running at a decade high, economists said. At 0.5 percent, Japan's benchmark interest rate is the lowest among major economies.

``So far, inflation in Japan is generally considered a short-term phenomenon'' because wage growth is stalling and prices excluding energy and food are stable, said Takuji Okubo, a senior economist at Merrill Lynch & Co. in Tokyo.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net