Will spring wage talks be the catalyst for Japan's economy?

Every spring, labour unions and management of major Japanese companies negotiate improvements in working conditions, such as higher wages and shorter working hours, at the shunto spring wage talks.

This year, key unions and their employers reached a preliminary agreement to raise overall wages by 3.8% – the most since 1993, and noticeably more than the previous year’s final tally of 2.07%. This is the result of the announcement of exceptional wage increases, particularly by major companies.

The wage increase rate for non-full-time workers, such as part-time and contract workers, was 5.91% on an hourly wage basis. This is an increase of 3.35 percentage points over the same period last year.

The driving force behind these wage increases was a sharp rise in prices: the nationwide core consumer price index (CPI) which excludes volatile fresh food jumped 4.2% in January versus the same month a year earlier, the sharpest rise in 41 years and four months.

Meanwhile, real cash earnings for Japan’s workers declined 4.1% in January from a year earlier, taking into account price changes. This was the 10th consecutive month of decline in real wages and the largest decrease in eight years and eight months since May 2014, when prices rose in the wake of the consumption tax rate hike to 8%.

Nissan fully accepted the labour union’s demand for a JPY12,000 (around $90) pay increase per month in this year’s shunto talks, giving full approval for the third consecutive year. This is the highest level of wage increase since 2005 when the company introduced its current wage structure.

Toyota announced a wage increase of up to JPY9,370 (around $74), the highest level in the past 20 years, and Honda also agreed to fully meet its request for a salary and bonus increase of JPY 19,000 (around $144) per month, the highest level in 30 years.

Twelve major electronics manufacturers are also providing pay raises demanded by labour unions including Panasonic, Hitachi and Mitsubishi Electric, which agreed to a JPY7,000 (around $53) base pay hike.

While the rapid rise in prices has reached a historic level in Japan, wage growth has not kept pace, and it can be seen as a result of management facing up to the current situation in which people's lives are being squeezed and responding to the situation.

The key to Japan's economic revival will focus on whether small and medium-sized enterprises (SMEs), which account for 70% of employment in Japan, can raise wages in response to these trends.

In addition to the impact of the prolonged spread of COVID-19, SMEs are facing a difficult business environment due to soaring energy and raw material prices. The impact of price hikes is severe, and many SMEs are finding it difficult to ask their suppliers to pass on the higher prices, which is putting pressure on their profits.

While some experts believe that the wage increases of large companies have come at the expense of SMEs, it will be essential for large companies to accept appropriate price transfers of cost increases by SMEs in order to spread the momentum of wage increases to SMEs.

Some experts have pointed out that the background to the string of full responses to wage increases is a temporary reaction to unexpected and historically high prices. The key to the future of the Japanese economy will be to create an environment for sustained wage increases and to link this to structural reforms.

Wage levels in Japan remain low by international standards. The Organisation for Economic Cooperation and Development's (OECD) 2023 forecast of wage levels by country shows that Japan has the lowest annual income among the seven major industrialized countries at approximately $32,000 (JPY4.39 million), while the United States has the highest, at $76,000, a difference of more than twice as large.

To overcome this situation, in January, Japan's Prime Minister Fumio Kishida expressed his determination to promote labour market reforms to realize ‘structural wage increases’ by setting three pillars: support for skill development through reskilling, changing the seniority-based wage structure of companies to a Japanese-style job-based wage structure that emphasizes ability, and smooth labour mobility to growth areas.

With the acceleration of price hikes gaining momentum, when will wage increases really catch up with price hikes? We will have to watch the situation carefully.