(Bloomberg) — Japan’s largest labor union federation aims to secure wage increases averaging at least 5% in next year’s pay negotiations, in a bid to maintain momentum after major gains this year, according to local media reports.
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A year ago the annual process began with the same goal, with the final tally for 2024 ultimately showing gains of 5.1%, the biggest increase for the group’s workers in 33 years.
Whether the momentum holds is under close scrutiny as wage trends remain a key component for Japan’s economy, potentially holding the key to both Prime Minister Shigeru Ishiba’s future and the Bank of Japan’s policy path. Ishiba has already vowed to push for real wage gains as he heads into a general election on Oct. 27, after voter frustration over rising costs of living was among factors prompting his predecessor Fumio Kishida to step down.
“What voters and consumers ultimately want is stability,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting. “From the consumers’ perspective, they want the government to fulfill its promise of making people’s lives better by achieving wage growth and price stability in a balanced way.”
In the runup to the snap election, parties are increasingly touting strategies to address wage growth. Recent opinion polls indicate that voters care most about what they’re paid, and measures to ease the hit from inflation among the major issues being debated ahead of the vote.
Ishiba has pledged to end deflation and achieve wage growth that outpaces inflation, as price growth has proven to be sticky. Data Friday showed that consumer inflation rose 2.4% in September, a result that stretches the number of months at or above the BOJ’s 2% target to 30.
Meanwhile real wages have fallen back into negative territory after two months of gains, making it unclear whether Ishiba can follow through on his promise.
In a likely bid to win over voters, earlier this month Ishiba instructed ministries to compile an economic package that includes measures to support wage growth, especially in rural areas, but the details remain unclear. The premier also voiced support for his predecessor’s initiative on raising the nation’s minimum wage to ¥1,500 ($10), bringing forward the target to within the 2020s from the mid-2030s, but that goal would need unrealistic gains for the next five years to be acheived.
Opposition parties are also campaigning on pledges to improve financial conditions for households. The Constitutional Democratic Party has proposed lowering the central bank’s price target to “above 0%” from 2%, while parties including the Democratic Party For the People and the Nippon Ishin Party have suggested cutting the consumption tax. Most parties agree with Ishiba on the minimum wage target.
The BOJ will also be watching the wage discussions closely after optimism surrounding last year’s negotiations became a crucial factor in the policy board’s March decision to end the world’s last negative rate with its first hike in 17 years. In making the change, authorities indicated the bank’s stable inflation target of 2% had come into sight, and a virtuous cycle of wages feeding into demand-led inflation was emerging.
Eiji Maeda, a former executive director at the BOJ, earlier this month cited wage hike momentum as a key factor that could prompt another rate increase as early as December, although his base case is for a move in January. The board is widely expected to stand pat when it next sets policy on Oct. 31.
Several factors could still weigh on wage growth, going ahead. Companies recorded bumper earnings last year, with the weak yen particularly helping exporters such as Toyota Motor Corp., which posted record operating profits. But the yen has broadly begun gaining against the dollar, as the US-Japan interest rate differential narrows. The currency effect as well as slowing growth in the US and China could undermine Japanese firms’ earnings from here, making it harder for companies to dole out large pay increases.
Another concern is that smaller firms severely squeezed by persistent inflation may not be able to follow through on pay increases. During this year’s wage negotiations, 60% of surveyed small-and-medium sized businesses that planned to forego wage hikes cited financial constraints.
In 2024, businesses with fewer than 300 employees meted out wage hikes averaging 4.45%, according to Rengo’s final tally. For next year, the federation is pushing these businesses to come through with hikes of at least 6% in order to narrow the pay gap with larger firms, according to local media.
Japan’s chronic labor shortage will likely continue to help with wage growth. The unemployment rate has remained below 3% for over three years, the lowest level among developed economies. A significant percentage of companies that raised wages this year cited the need to attract and retain talent as a primary reason for that decision.
Still, with financial resources scarce, firms facing manpower constraints may struggle to raise salaries. A record 194 companies have gone bankrupt this year due to labor shortages, with 65 citing higher labor costs as a contributing factor, according to Tokyo Shoko Research.
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