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Record Wage Increases by Japan’s Largest Employers Signal Departure from Deflationary Era

Japan’s major employers have announced unprecedented pay increases, marking a significant shift away from the deflationary mindset that characterized the country’s prolonged period of low economic growth, famously termed the “lost decades.”

Each spring, negotiations, known as shunto, between unions and management set the stage for monthly wages ahead of Japan’s fiscal year starting in April. On Wednesday, companies like Toyota Motor, Hitachi, and Panasonic Holdings fully acceded to labor unions’ demands for wage raises.

Nippon Steel, for instance, declared a historic raise of 35,000 yen ($237) per month, a remarkable 14% increase, surpassing its previous record set in 1979. The steel giant emphasized the necessity to secure talented individuals and enhance overall employee productivity, particularly in the wake of its recent acquisition of American peer U.S. Steel.

Toyota, while not disclosing specific wage details, confirmed meeting union demands entirely. The Toyota Motor Workers’ Union, leveraging the company’s record-high profit forecast, advocated for significant bonus payments and proposed specific wage increases for various job categories.

Hitachi and Toshiba echoed similar sentiments, highlighting that their wage hikes represent the largest since the adoption of the current negotiation framework in 1998.

Despite only 16% of workers in Japan being union members, economists closely monitor these negotiations as a pivotal indicator of monetary policy shifts. With core inflation maintaining a steady 2% for nearly two years, Bank of Japan Governor Kazuo Ueda stressed the necessity of a “virtuous cycle” of wage and price increases to achieve price stability, a prerequisite for initiating interest rate adjustments.

The Bank of Japan’s upcoming policy meeting carries substantial anticipation, with economists divided on the possibility of policy alterations, though most anticipate changes by next month.

Decades of low inflation or deflation compelled many Japanese firms to adhere to seniority-based pay systems, linking pay raises to years of service. However, the current surge in wage hikes transcends tradition, incorporating base-ups, wherein pay increases irrespective of seniority status.

A confluence of factors, including acute labor shortages and persistent inflation, is propelling these wage hikes. A weak yen bolstering profits for export-oriented companies further incentivizes substantial pay raises by major employers.

Professor Hisashi Yamada of Hosei Business School of Innovation Management noted, “The severity of the labor shortage necessitates wage hikes,” emphasizing that companies quickly reaching agreements indicate pre-existing plans for wage increases.

This year’s negotiations, with unions demanding an average 5.85% wage hike, mark the highest since 1993, according to the Japanese Trade Union Confederation (Rengo). Such demands exceed economists’ expectations, driving speculation on the cessation of the Bank of Japan’s negative interest rate policy.

While optimism surrounds the potential for wage hikes to stimulate consumption, concerns persist regarding their sustained impact. Despite historical precedents of double-digit wage increases in the 1960s and 1970s, recent years have seen modest growth, hovering around 1% to 2%.

Takeshi Niinami, CEO of Suntory Holdings, anticipates substantial wage growth this year, which could bolster real wage growth by mid-year. However, economists like Toshihiro Nagahama caution that efforts to curtail overtime and rising prices may offset wage increases, dampening immediate gains.

Marcel Thieliant, senior Japan economist at Capital Economics, predicts this year as a peak for wage growth, suggesting that future hikes may not match current levels due to anticipated lower inflation.

Ultimately, the impact of these negotiations extends beyond large corporations, with attention shifting to the diffusion of wage increases to small and midsize enterprises, grappling with escalating costs and labor shortages. Source: Nikkei Asia 

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