Japanese pay hit by rising costs

Japan's wages dropped at their fastest pace in 3½ years in December, fuelling concern that higher corporate profits are not being felt in workers' pockets in spite of six years of growth.

Wages fell 1.9 per cent as small and medium-sized companies were unable to pay higher winter bonuses because of the increased cost of raw materials and oil.

The absence of what the Bank of Japan calls the "virtuous circle", in which higher output spreads to other parts of the economy, has stifled domestic demand and left the economy firing only on one, export-led cylinder. That makes it more vulnerable to a global downturn, economists say.

Hideo Hayakawa, general manager of Bank of Japan's Nagoya branch, said that even in his prosperous manufacturing region, where Toyota's success is fuelling a mini-boom, small firms were generally unable to raise wages.

He said profit margins had been particularly squeezed in the past six months, with an accelerated rise in input prices that companies were unable to pass on to consumers.

Intense pressure from low-cost foreign producers had left firms unable to raise wages, Mr Hayakawa said. Increased foreign ownership of big firms also meant dividend payments had risen at the expense of better salaries.

Falling wages appear to be hitting consumer sentiment, and the headline inflation rate rose to 0.8 per cent in December, its fastest in a decade.