The ludicrousness of Japan’s Salary Bonus System: How it contributes to Japan’s deflationary spiral

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Hi Blog.  Big news across Japan these past couple of days has been how the Winter Bonus has been slashed between 10 to 15 percent for bureaucrats:

Japan Times Friday, Dec. 11, 2009
Bureaucrats’ winter bonuses shrink
Kyodo News (excerpt)
Central and local government employees got smaller winter bonuses than usual Thursday as the protracted recession took its toll on compensation, according to estimates from the Internal Affairs and Communications Ministry.

The bonus for a 35 1/2-year-old civil servant with a nonmanagerial job came to an average of ¥647,200, down 6.6 percent, while that for a 36.6-year-old local government employee came to ¥607,000, down 7.3 percent, the ministry said.

Rest of the article at http://search.japantimes.co.jp/cgi-bin/nb20091211a5.html

(BRIEF ASIDE FOR THOSE UNFAMILIAR WITH JAPAN’S “BONUS” SYSTEM:  Those of us on regular full-time salaries get paid monthly, then get a “bonus” of several months pay every six months (usually between two to six months’ pay total, divided by two times a year, which in effect increases your total annual salary mathematically by about a third).  This has long been standard practice in Japan, and every June and December the postwar Japanese economy suddenly becomes awash in cash, as families suddenly get a glurt of around 100 man en in their accounts.)

Some people might say, well, tough beans — these bureaucrats were being overpaid anyway, so it’s about time.  The problem is that this practice is a bellwether:  other industries see this as an excuse to cut their own salaries.  My university (which is private-sector, but they directly cited the Bonus cuts to the national bureaucrats (kokka koumuin) as justification) cut all of our Bonuses this year and will continue to do so in perpetuity.  As in:  they cut our bonus multiple from 4.5 months’ salary total per year to 4.15 months’, and will not change that until the national bureaucrats revise their multiple upward.

So that means my Winter Bonus this December dropped by 15% compared to the same Winter Bonus December of last year, or about a drop of 12 man before taxes, and man am I pissed off about it.  (I might add that this is on top of the general trend:  my total annual salary has dropped more than 200 man between 2003 and 2008.)  This means that paying off my bank loan for the house I built back in 1997 (I owe three months’ mortgage payment every bonus), and a bit of insurance on top of that, completely devoured my Bonus for the first time ever yesterday.  Any more cuts, and I’m going to lose money every Bonus period.

That’s if I get a Bonus at all.  That’s the screwy thing about this Bonus System.  It’s fine in a high-speed growth economy, where you have businesses withholding about three to six months’ pay so they can earn interest on it, then pay your employees in a glurt and keep the interest.  But banks in Japan don’t pay interest anymore, so that’s no longer an incentive.

And in a mature (or even flat or negative GDP for the past two decades) economy, the Bonus System just doesn’t make sense anymore.  When you can at whim withhold a third of somebody’s salary just because the company feels it didn’t perform well enough this quarter, that should be cause for strikes and reforms.  But Japan’s unions are pretty weak and underwhelming in negotiations (compared to, say, Korea’s), and I have heard no voices yet for abolishing the Bonus System in favor of a flat (and higher) monthly salary.

I heard yesterday from a friend that he heard on the TV wide shows that only 14% of all people surveyed got a rise in Winter Bonus this December.  Everyone else either had no change, a drop, or NO BONUS AT ALL.  (I searched for a source for this, but came up short.  Debito.org Readers, please have a look around too.)  If this is true, and almost everyone is getting screwed by this system and losing money in real terms, it’s not just a labor issue anymore:  We’re talking about a deflationary spiral, as domestic consumption decreases and domestic demand follows suit, and more companies find themselves yet again cutting Bonuses because they say they have to, but really because they can.

Considering that banks in Japan do not offer refinancing deals (mine, Hoku’you, formerly Takugin, doesn’t; I asked), this deflationary spiral just means they’re taking more money from me even if my monthly payments stayed the same.  (They’re not, by the way — they’ve gone up about 1 man per month over the past two years!  Double whammy.)  And banks are wondering why more people are defaulting on their loans these days?  They should stop being greedy and start lowering their premiums too to match the fact that people in general are being paid less.  But that’s not going to happen for the foreseeable future, because there’s no precedent for it.  Meanwhile, Japan just keeps sinking deeper, as “the system that soured” (to quote Richard Katz) gets more and more sour.

Lose the Bonus System.  It is increasingly becoming a way to deprive workers of a third of their annual salary at corporate whim.  And it only feeds the forces that are hurting Japan’s consumers.  Arudou Debito in Sapporo

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UPDATE DEC 17:  Courtesy of Ken.

Winter Bonuses To Fall To 20-Year Low: Nikkei Survey
http://www.nni.nikkei.co.jp/e/fr/tnks/Nni20091210D10JFF05.htm

TOKYO (Nikkei)–Overall winter bonuses to be paid this year will tumble to a level last seen 20 years ago, according to final estimates that Nikkei Inc. released Thursday.

A drop in winter bonuses may mean a gloomy year-end shopping season.

The weighted average bonus is seen falling 14.81% from the previous year to 701,571 yen before taxes, down for the second straight year. This is the sharpest drop since the survey was first conducted in 1978.

The Nikkei tabulated the bonus payment plans of 643 companies. The percentage of firms that will cut bonuses rose from 51% in last year’s survey to 83%. Meanwhile, those planning to raise bonuses fell from 44% to 12%.

The bonus cutback signals that corporations are still trying to curb personnel costs due to uncertainties over future economic trends, despite some earnings improvement from growth in emerging markets.

Bonuses are expected to fall 17.71% at manufacturers. The automobile and electronics sectors, which had increased bonuses in 2008, are poised to cut them by around 20% this year due to slumping exports caused by the global economic downturn and strong yen. Food producers plan to raise bonuses by 0.26%, making it the only group among the 18 manufacturing sectors to boost payments.

Nonmanufacturers plan to reduce bonuses by 5.17%, except for firms in the land transport sector, which plan to bump up payouts by 0.08%.

(The Nikkei Dec. 11 morning edition)

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