TOKYO, Oct 5 (Reuters) Japan is undergoing its longest period of economic prosperity in more than 50 years, marked by strong exports and a tight labour market, but one thing puzzles central bankers -- why aren't wage earners sharing the spoils? Japan's unemployment rate has been below 4 percent since April and stood at a nine-year low of 3.6 percent in July -- the sort of figures central bankers would normally expect to fuel inflation as firms raise wages to compete for available workers.
Instead, Japan's wage growth is tame, keeping a lid on consumer spending and undermining the central bank's case to raise its low interest rates of just 0.5 percent.
''The BOJ has suggested that tight job conditions would push up wages, but I'm sceptical that will happen in the near future,'' said Kiichi Murashima, an economist at Nikko Citigroup.
''The BOJ may not be focusing much on the underlying price trend in guiding policy, but tame wages and consumer spending will potentially delay the pace of rate hikes,'' Murashima said.
The central bank is not in a rush to raise interest rates, especially as some policy makers question if Japan has shaken off nearly a decade of deflation.
But it fears the longer they remain at such low levels, the greater the chance of sparking a surge in economic growth and inflation that might be difficult to control.
SMALL FIRMS SQUEEZED The Bank of Japan may have to wait a while longer before wages pick up steam and provide strong evidence of inflation.
Lots of reasons have been put forward to explain Japan's weak wages growth -- such as how the country's well-paid baby-boomer generation are rapidly retiring to be replaced by lower-paid youngsters or even being re-hired on lower pay.
But economists say the big factor is that tough business conditions are preventing Japan's small firms -- which employ 7 out of every 10 workers -- from raising wages.
''A main reason for tame wage growth is a worsening of business conditions such as rising commodity prices, especially for small firms,'' said Hiroshi Shiraishi, an economist at Lehman Brothers.
''As long as they suffer, wages won't rise across-the-board.'' The Bank of Japan's tankan corporate survey this week showed confidence among big manufacturers was upbeat in September but confidence worsened among small firms, many of which face pressure to cut their selling prices even though their costs keep rising.
Other evidence shows how this has played out in wages.
Total cash earnings for Japanese workers in August rose a tepid 0.1 percent from a year earlier, the first rise in nine months.
For firms employing less than 30 people, cash earnings fell 0.4 percent, extending a slide seen since the start of 2006.
''There may be such factors behind the delay that small firms cannot pass on the higher costs to customers and have no choice but to put downward pressures on wages,'' BOJ Board member Miyako Suda said at a news conference last week.
In another sign of stagnant wages, unit labour costs, an inflation measure favoured by the government and the BOJ, fell 1.35 percent in April-June from the same quarter a year earlier. This data has been in negative territory for nearly a decade.
SHARING? The government and the central bank have predicted the strength of the corporate sector would eventually spill over to households through higher wages.
Bit instead of raising salaries, analysts say firms are boosting spending on plant and equipment to compete in the global marketplace and shelling out more for dividends.
The number of employees has risen for more than two years without triggering wage inflation, although analysts say this can be explained by the country's ageing population, as the baby-boom generation, born just after World War Two, start to retire.
''Well-paid employees are being replaced by low-salaried young workers and part-timers,'' said Taro Saito, senior economist at NLI Research Institute.
''It's the structural factors that put a lid on wages.'' To secure workers longer term, some companies, such as Toyota Motor Corp and Fast Retailing Co Ltd, have started turning more contract workers into full-time staff.
But that will not guarantee rising wages as many firms no longer follow a tradition of setting salaries based on seniority.
''We want to give employees a sense of job security to keep skilled workers as we face a labour shortage,'' said Terunobu Aono, a spokesman of Fast Retailing.
''But that does't mean we will go back to the good old days when wages rose in accordance with the length of employees' service... We just cannot afford it in this age of competition.'' REUTERS SR SSC1150