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Friday, 01 December 2023
Japan Inc provides biggest wage increases in years

Japan Inc provides biggest wage increases in years

Top Japanese companies offered their largest pay increases in a quarter century on Wednesday as the outcome of annual labour talks showed them heeding, at least for now, Prime Minister Fumio Kishida's calls for higher wages to counter inflation.

Worker pay has been one casualty of the years of sputtering growth in the world's third-largest economy since the late 1990s, leaving Japanese salaries well behind the OECD average.

But now the weak yen and rising commodities prices are driving up import costs and have pushed inflation to its highest in four decades, prompting Kishida to beat the drum for better pay.

It remains to be seen whether the higher wage trend will be sustainable, let alone create the "virtuous cycle" of stronger economic growth and 2% inflation long sought by Japan's central bank.

It also remains unclear whether the wave of wage hikes will spread to smaller firms that employ seven out of 10 workers in Japan but often struggle to pass on costs to their bigger customers.

Big companies are expected to raise wages by around 2.85% at the "shunto" spring wage talks that wrap up on Wednesday, according to a survey of 33 economists taken by Japan Economic Research Center (JERC).

That's far above last year's 2.2% and the fastest gain since 1997, when Japan slid into 15 years of deflation. The Rengo umbrella labour group has called for a 5% increase. The talks cover both base and bonus pay.

"Rather than a change in the stance of companies, this is more a case of a temporary reaction to unexpected and historically high prices. It is unlikely that wage hikes will just continue next year and after regardless of what happens with prices," said Takahide Kiuchi, a former Bank of Japan board member who is now executive economist at Nomura Research Institute.

"The increase from the shunto wage talks this year will not immediately lead to a big change in monetary policy."

Industrial conglomerate Hitachi (OTC:HTHIY) Ltd, a cornerstone of corporate Japan, said it would increase overall wages by an average of 3.9%, compared to a 2.6% increase a year earlier.

Given that consumer inflation, at 4.1%, outpaces wage hikes, pay rises of 3% or more need to continue in the coming years to sustain price stability at the central bank's targeted 2%, said Hisashi Yamada, senior economist at Japan Research Institute.

The JERC survey showed that excluding seniority-based pay, base compensation that boosts fixed labour costs accounts for just 1.08%.

Kishida's government will likely hold a joint three-party meeting with labour and management for the first time in eight years on Wednesday to ensure structural wage hikes.

Japan's economy narrowly averted a recession in the final months of 2022 amid frail consumption.


But there are already some encouraging signs.

Workers from Japan's largest group of trade unions last week struck early agreements for hefty wage hikes. Other unions from Toyota , the world's No. 1 automaker, and Honda, have also secured their biggest pay rises in decades.

Every March, more than 300 major firms negotiate with their union following wage pace-setters such as Toyota Motor (NYSE:TM) Corp.

Unions have historically tended to settle for relatively meagre pay hikes of around 2% in recent years, as they are inclined to cooperate with management in keeping job security rather than demanding bigger pay rises.

Some analysts are also sceptical that unions will be as aggressive in demanding higher pay in coming years if inflation eases, as it is expected to from the middle of the year.

Real wages fell in January at the fastest pace since May 2014 when the sales tax was raised to 8% from 5%.

Japan's wages have grown just about 5% over the last 30 years, far below an average 35% gain among member countries during the same period, OECD data shows.

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