* Weak spending raises questions about economic outlook
* Some worry spending could disappoint after sales tax hike
* Workers lack confidence to spend, blow for Abenomics
* Jobless rate at six-year low, but contract workers at record high
* Job security a concern, doubts many firms can afford to raise wages
By Stanley White
TOKYO, Feb 18 (Reuters) - Japanese consumers ended last year with a whimper instead of the bang many had expected, reinforcing a nagging worry that the prime minister’s aggressive policies are struggling to find support among those key to its success.
Economic growth figures on Monday added to evidence that concern about job security is holding back consumers, trumping the urge to spend before a rise in the national sales tax rate in April makes goods more expensive.
Although Japan’s jobless rate is at a six-year low, the number of contract workers, who are paid less than regular staff, is at a record high.
That equation is undermining the government’s base scenario that consumer spending will boom in the months before the tax hike, fall sharply immediately afterwards and then resume steady growth underpinned by falling unemployment and rising wages.
Such a scenario is key to the broader goal of dragging the sluggish economy out of almost two decades of stagnation marked by grinding deflation and on to a path of sustainable growth.
“We’re facing the uncomfortable possibility that consumer spending won’t get any better before the tax hike,” said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co.
“The jobs market is improving, but the problem is non-regular workers. This could be behind disappointing spending.”
The government, which has played an unusually prominent role in lobbying companies to raise wages, could come under pressure to use more structural economic reforms to broaden growth and reverse labour market reforms that could increase contract workers.
The Bank of Japan could face calls to ease policy but can likely fend off the pressure, arguing that its economic forecasts already take into account swings in consumer spending. It unleashed a programme last year of massive cash injections into the economy that is now bigger than that of the U.S. Federal Reserve.
GDP figures on Monday showed that Japan’s private consumption grew a weaker-than-expected 0.5 percent in the fourth quarter of last year. This confounded expectations for 0.7 percent growth.
Overall economic growth in the October-December period was much lower than expected at 0.3 percent.
Purchases of cars were the main reason for the increase in consumption, but Japanese spent less on clothes and food, which pessimists say is a sign of weakening confidence because it suggests lower income earners are holding back.
In December, consumer sentiment hit the lowest level in just over a year due to a spreading fear that wages will stop improving, Cabinet Office data showed.
A six-year-low jobless rate of 3.7 percent should, in theory, give consumers confidence to spend. But new jobs are going to contract workers, who earn on average only a third of what regular employees get paid.
In December, contract workers made up a record 37.5 percent of the workforce, up from 35.3 percent at the start of the year. During that time, the ratio of regular workers fell to 62.5 percent from 64.7 percent.
When Japan last raised the sales tax in 1997, contract workers accounted for around 23 percent of the workforce.
Compounding the problem, Abe is pushing legislation that would make it easier for companies to replace regular employees with contract workers.
The aim of the legislation is to make the labour force more mobile and flexible, but this could backfire by hurting consumption, just as it did when the ruling Liberal Democratic Party first expanded the number of contract workers in the early 2000s.
Abe’s government will raise the national sales tax of 5 percent - the lowest equivalent consumption tax alongside Canada in the OECD - to 8 percent in April to pay for healthcare costs in one of the world’s fastest ageing societies.
Some optimists argue there is still ample time for spending to pick up in the current quarter and that strong car sales in the fourth quarter showed people were willing to spend big.
However, others argue lacklustre spending overall is a symptom of declining confidence that Abe can succeed in encouraging companies to raise wages substantially.
That means consumption could stay weak later this year and make it politically difficult for Abe to secure a second planned stage in raising the sales tax to 10 percent in 2015 - part of a broad effort to rein in the country’s massive public debt that is more than double the size of the economy.
Under direct pressure from Abe, a few big-name companies such as Toyota Motor Corp and convenience store chain Lawson Inc have suggested they may raise base pay.
But there are doubts that smaller firms in Japan, which employ most workers, can follow suit. While Toyota expects to post a record operating profit this financial year, those further down the supply chain are feeling cost pressures. Pay rises are the last thing on their minds.
“The gains in wages so far are not spreading to consumption, meaning spending may not be strong enough to drive growth in the second half of the year,” said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
“There will be public works spending, but the scale and the impact could be less than in previous years.”
The government has already passed a 5.5 trillion yen stimulus package that relies on public works to prop up demand after the tax hike.
However, the government is already having trouble spending public works money due to a shortage of construction workers. If this delays the stimulus package, aggregate demand could suffer.