Japan’s social security burden frustrates BOJ inflation efforts

Japanese companies are paying more for employees these days. Problem is, the money is going toward social security payroll taxes instead of wages, adding to the frustrations of Bank of Japan policymakers seeking higher wages and stronger inflation.

While businesses haven’t raised salaries much, their mandatory contributions to employees’ social insurance programs have been rising for years, both in nominal terms and as a share of economic output.

Firms worry they will be made to carry an ever-larger share of the burden of paying for the nation’s retirement and health care, as the population ages rapidly and the government struggles with the world’s biggest debt burden. Throw in uncertainty about the nation’s economic prospects, and you end up with a strong reluctance to raise wages or hire workers.

“The rapidly rising labor costs are increasingly becoming a source of major concern for companies,” said Kenji Yumoto, vice chairman of the Japan Research Institute and a former senior economist at the Cabinet Office. “The aging demographics will only keep increasing the cost of running a business, while they are uncertain about the prospects for Japan’s long-term economic growth.”

Solid wage growth has been a key missing link in efforts to revitalize the economy even as Abenomics, Prime Minister Shinzo Abe’s three-pronged growth program, has fueled record profits at big companies. Abe has at times personally pressed some top business leaders to give bigger pay raises, with little success. Now, ahead of a snap election, he said he plans to divert some tax money meant for social security to education, leaving unanswered the question of how those future social security obligations will be met.

While pay has stagnated for years, even falling at times, companies’ social security payments for employees rose 11 percent over the decade through fiscal 2015, according to Keidanren (Japan Business Federation), the nation’s biggest business lobby. Those payments have grown as a share of the economy for decades, and in recent years consistently exceeded businesses’ income tax payments, according to Daiwa Institute of Research.

Still, while the onset of a long-term labor shortage is worsening anxieties about rising costs, companies are probably too cautious about raising wages, given their profitability, Yumoto said.

Social insurance premiums are a big reason companies hire so many nonregular workers, temporary employees for whom companies aren’t required to pay such premiums. According to a report from the NLI Research Institute, the cost of a regular worker is 2.4 times that of a nonregular employee.

Economists point to the dual labor market as a shackle on the economy. Nonregular workers now make up 38 percent of the workforce, and their lower pay and lack of job security hurts consumption and inflation.

Citing the risk to the economy, Abe has twice postponed another increase in the sales tax, one of a series planned to help pay for social security costs. In calling a snap election, he said this week that he would proceed with the next increase, scheduled for October 2019, but use some of the money raised to pay for free education.

This is unlikely to comfort businesses. While the rate they pay toward pension premiums is scheduled to stop rising this year, there is no guarantee they won’t be asked to pay a higher rate in the future, particularly if money from the sales tax goes elsewhere.

Economists such as Yumoto argue for a sharply higher sales tax as the solution.

“To restore Japan’s fiscal health, the sale tax needs to be raised at least to 17 percent,” he said.

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