There are signs wages in Japan are finally on the rise

Over a private dinner late last year, the chief executive of a large listed Japanese company was doubtful about whether annual spring wage talks in 2023 would finally deliver increases in pay.

He told me that his guess was that the talks would lead to another false dawn, continuing a long, unerring cycle in Japan. With an ever-tightening labour market and nearly a decade of direct government lobbying to businesses to raise wages, each year felt like there was a sense of change in the air.

And at the end of every March, investors realised their hunch was wrong once again as Japanese companies resisted raising wages and workers abandoned making aggressive salary demands. Even with global inflation rising, the Japanese chief executive thought the Kishida administration would struggle to convince companies to finally raise wages.

But at the risk of jinxing things, it does actually feel there are grounds for optimism that the big moment Japan and its central bank have been desperately waiting for over the past three decades is coming.

Beyond headline figures that show a bigger than expected increase in monthly base salary by large businesses, companies including Uniqlo owner Fast Retailing and carmaker Toyota are fundamentally changing their pay structure. This is partly to adapt more closely to international standards but also a more liquid job market that places a bigger emphasis on performance rather than seniority. That raises the risk that employees could be poached by competitors offering higher pay — a threat largely absent in the past.

The wage increases also are bolstered by inflationary pressures, with Japan’s consumer prices rising at the fastest pace in 41 years. While inflation was initially triggered by the global energy crisis rather than strong underlying demand, there are increasing signs that price pressures are proving sticky. In turn, this has raised hopes that inflation will lead to higher wages.

“Maybe this is really the catalyst for the structure of the Japanese economy to change for the first time in 30 years,” says a former Bank of Japan official. “Of course, it hasn’t happened yet but the possibility for change has now emerged.”

Fast Retailing stunned the nation in January with a plan to raise wages in Japan by up to 40 per cent. Gaming group Nintendo, drinks company Suntory and printer manufacturer Canon also revealed that they were increasing pay for some workers.

The shunto wage negotiations then kicked off in February with a surprising decision from Toyota, a bellwether for Japan Inc, to grant its 68,000 unionised workers in the country their highest pay rises in about two decades. The move was quickly followed by its rival Honda.

According to trade union confederation Rengo, Japan’s major companies agreed to grant an average pay rise of 2.3 per cent, excluding seniority-based pay, for the financial year that begins in April, compared with 0.5 per cent a year earlier.

So far, the markets are still divided on what that means for Japan, with economists at SMBC Nikko saying the strong wage negotiations are simply “one milestone” but Deutsche Securities hailing the outcome as “not just a one-time phenomenon but a vital step forward in the shift to an inflationary equilibrium”.

The caution from many economists is well justified. It remains far from clear whether companies can sustain the wage increases into next year especially with the global economic outlook becoming increasingly uncertain.

The shunto negotiations also involve only the largest corporations. For the small and medium-sized enterprises that employ at least 70 per cent of Japanese workers, the hurdles to salary increases are particularly high.

Still, even some of the smaller employers, who are struggling with the rising cost of imported materials, are being forced to raise wages to maintain their workers in an extremely tight job market.

Sayuri Takashima, a 46-year-old president of a tiny metal processing company in Osaka, increased the monthly pay for its eight employees by 30 per cent last fall despite wrestling with soaring steel and electricity costs. “In this age, my workers can easily find jobs with better conditions,” says Takashima.

It will be critical for Japan to encourage such a liquid job market. If the country is to break out of its past cycle, that could provide the key to sustaining the wage momentum.

kana.inagaki@ft.com