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Conditions in Japan appear to be ripe for higher wages, as companies are sitting on stockpiles of cash on the back of record profits in recent months.Tomohiro Ohsumi/Bloomberg

To shore up his ailing premiership, Japanese leader Shinzo Abe is vowing to focus on the economy. But instead of unleashing yet more stimulus, analysts say Mr. Abe needs to take a hammer to an old chestnut: moribund wage growth.

Facilitating salary increases would boost household income, and for Mr. Abe, help convince an increasingly skeptical electorate that his eponymous economic policies are working for them. The problem is, employers remain reluctant to boost pay despite record-low unemployment and bumper profits.

Facing two days of questioning along with aides over allegations of cronyism, Mr. Abe on Monday signalled a renewed focus on the economy and the quest to raise wages. Failure on that front has left the Bank of Japan shouldering the burden with unprecedented stimulus and still years away from meeting its 2-per-cent inflation target.

"Abe needs to focus on economic policy to win support back," said Akihiko Noda, senior principal researcher of Mizuho Research Institute. "That will definitely help."

The International Monetary Fund says labour market reforms to boost productivity and wages are the "first priority" of Abenomics' structural reform agenda. The Washington-based fund recommended raising "administratively controlled wages," such as civil servants' pay, in line with the inflation target and providing incentives to profitable companies to boost wages by at least 3 per cent a year.

Indeed, conditions in Japan appear to be ripe for higher wages. Companies are sitting on massive stockpiles of cash, and they marked their most profitable quarter on record during the three months ending December, 2016. Unemployment is at 3.1 per cent, the lowest among G7 countries, and the jobs-to-applicants ratio is at the highest point in more than a quarter century.

Yet – just as in other big developed economies including the United States, Britain and Germany – all that labour market tightness is failing to translate into wage inflation. Year-over-year measurements of real wages fell from 2012 to 2015, and grew just 0.7 per cent in 2016, according to data from the labour ministry.

Part of the problem for Japan is a legacy from the country's economic crash in the early 1990s. In the years that followed, workers accepted lower salaries to secure their jobs, weakening their negotiating positions, according to the Annual Report on the Japanese Economy and Public Finance 2017 published last week by the cabinet office.

The Abe government's basic economic policy document for 2017 notes the importance of "equal pay for equal work," and raising Japan's minimum wage. The former refers to efforts to equalize pay between regular and non-regular workers who perform the same jobs. On the latter, the administration is sticking to a goal of achieving a weighted average minimum pay of ¥1,000 yen ($11.25 Canadian) an hour across the country.

And wages have crept upward, rising 0.6 per cent in May from a year earlier. But that's not enough to spur the 2-per-cent inflation sought by the BoJ, nor is it enough to make households feel better off. A poll by the cabinet office in August, 2016, found that 49.6 per cent of respondents were dissatisfied with their income.

Politically, that's adding to the slide in approval for Mr. Abe's cabinet, which sank to 26 per cent – the lowest since he took office in 2012 – in a poll conducted by the Mainichi newspaper over the weekend. On Monday, Mr. Abe reiterated denials of accusations of cronyism, which have eaten away at his support.

"With Japanese administrations, scandals accumulate like barnacles, and Abe needs to get ahead of that narrative with new initiatives, most of which will be tangential to the economy," said Douglas Paal, a vice-president at the Carnegie Endowment for International Peace. "The Bank of Japan has done, and is still doing, all it can responsibly to stimulate growth."

The sinking ratings are also a warning that the public remains to be convinced by Abenomics and that a reliance on fiscal and central bank policies isn't enough, said Martin Schulz, an economist at the Fujitsu Research Institute in Tokyo.

"Japan's electorate is aware of the lack of economic reforms and realizes the risks of an exhausted monetary policy," he said.

That means cracking the wages conundrum will prove vital if Japan is ever to wean itself off the unprecedented monetary stimulus unleashed by the central bank.

"Without robust wage growth, inflation will remain stuck a long way from the central bank's 2-per-cent target and Japan's debt burden will remain unsustainably high," said Adair Turner, chairman of the Institute for New Economic Thinking and a former British Financial Services Authority chairman. "So either we solve the wage puzzle, or we accept that extremely unconventional monetary policy will have to be applied forever."

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