Winter windfall

As year-end approaches in Japan, millions of employees receive a windfall in the form of thick bundles of cash. Biannual bonuses granted by Japanese companies, often of between two and six months pay, can amount to more than the price of a family car. Not surprisingly, retailers work hard to divert some of the river of money their way. Many of the washing machines, engagement rings and high-end golf clubs sold in Japan go out of the door in December.

Expectations this winter are unusually high. Japan’s recovery seems to have hit the buffers with this week’s news that the economy is back in recession. Shinzo Abe, the prime minister, has called a snap election next month, partly on the issue of whether to make consumer goods more expensive. That makes take-home pay even more vital than usual: wages are an indication of whether the government’s economic strategy “works or falls apart,” says Martin Schulz of the Fujitsu Research Institute, a think-tank based in Tokyo.

Japanese companies paid average summer bonuses of 370,000 yen (then $3,650), the highest year-on-year increase in 23 years, according to the labour ministry. The Japan Business Federation, or Keidanren, forecast last week that winter bonuses would probably rise by nearly 6% to an average of 874,000 yen ($7,400), one of the biggest on record. This prospect had some of the more excitable weekly magazines recalling the champagne-popping heights of the late 1980s.

Not everyone can expect a share in the bonanza, though. The Keidanren’s survey covers only listed corporations with at least 500 employees. By sector, manufacturers are particularly generous thanks to a profit windfall from exports on the back of the cheaper yen. Cement companies are flush too, amid a booming construction sector. But smaller companies are not doing as well, and although the size of payouts is growing, the actual number of bonuses is shrinking.

In theory, Japan’s private companies can afford to splurge. They sit on ¥229 trillion ($1.9 trillion) of cash and deposits, according to the Bank of Japan. This is a problem for Mr Abe. The prime minister has been leaning on the Keidanren to help deploy these vast reserves as part of his attempt to hike wages and re-inflate the economy. But real wages fell by 2.9% in September. Without sign of reforms and better business opportunities at home, many corporations are keeping their wallets shut.

One partial way around this problem is discretionary one-off payments, which do not commit companies to a hike in base pay that must be sustained for years into an uncertain future. In a country where layoffs are expensive and taboo, bonuses—essentially, withheld pay—are a flexible way to compensate employees without betting the farm. They can also help induce that most elusive of ingredients for economic success: consumer confidence.

Will this be enough to keep Mr Abe’s inflationary programme chugging along—assuming he wins the election? For the first time in a decade, monthly nominal wages in Japan (including bonuses) grew by more than 2% on average during the summer. Prices are rising, but not as quickly as the government would like. And this week Mr Abe postponed a second hike in the consumer (value-added) tax. A solid recovery in employee pay is “vital” for sustained economic recovery, a recent report by Bank of America Merrill Lynch argues.

The government will now be desperately hoping that those winter bonuses trickle down to the nation’s businesses. With an election looming and all sides still hedging their bets on Japan’s recovery, the risk for the economy is that millions of workers will instead stash the money away for a rainy day.