(Bloomberg) — Japan’s largest labor federation is aiming to secure wage increases averaging at least 5% in next year’s wage negotiations, trying to maintain momentum after big gains this year, according to local media reports.
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The annual process began a year ago with the same aim, with the final count for 2024 ultimately showing a gain of 5.1%, the biggest increase for the group’s employees in 33 years.
Whether the momentum holds will be closely watched, as wage developments remain a key component for the Japanese economy and potentially hold the key to both Prime Minister Shigeru Ishiba’s future and the Bank of Japan’s policy trajectory. Ishiba has already pledged to push for real wage increases as he heads into the Oct. 27 general election, after voters’ frustration over rising living costs was one of the factors that pushed his predecessor Fumio Kishida to resign .
“What voters and consumers ultimately want is stability,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting. “From a consumer perspective, they want the government to deliver on its promise to improve people’s lives by delivering wage growth and price stability in a balanced way.”
In the run-up to early elections, parties are increasingly using strategies to tackle wage growth. Recent polls indicate that voters are most interested in what they get paid, and that measures to soften the blow of inflation are one of the key issues being debated ahead of the election.
Ishiba has pledged to end deflation and achieve wage growth that exceeds inflation, as price growth has proven stubborn. Data on Friday showed consumer inflation rose 2.4% in September, a result that stretches to 30 the number of months at or above the BOJ’s 2% target.
Meanwhile, real wages have turned negative again after two months of gains, making it unclear whether Ishiba can deliver on its promise.
In a likely bid to win over voters, Ishiba earlier this month ordered ministries to put together an economic package that includes measures to support wage growth, especially in rural areas, but the details remain unclear. The prime minister also expressed support for his predecessor’s initiative to raise the country’s minimum wage to ¥1,500 ($10), bringing forward the target from the mid-30s to the 2020s, but that target would be over the next five years need unrealistic profits. reaches.
Opposition parties are also campaigning on promises to improve financial conditions for households. The Constitutional Democratic Party has proposed lowering the central bank’s price target from 2% to “above 0%,” while parties such as the People’s Democratic Party and the Nippon Ishin Party have proposed cutting consumption taxes. Most parties agree with Ishiba on the minimum wage target.
The BOJ will also keep a close eye on wage talks, after optimism surrounding last year’s negotiations became a crucial factor in the policy council’s decision in March to end the world’s last negative interest rate with the first hike in 17 years. In making this change, the authorities indicated that the bank’s stable inflation target of 2% had come into view, creating a virtuous circle of wages that fueled demand-driven inflation.
Eiji Maeda, a former executive director at the BOJ, earlier this month cited wage growth momentum as a key factor that could lead to another rate hike as early as December, although his base case is a January move. The board is widely expected to remain firm when it adopts the next policy on October 31.
Several factors could continue to put pressure on wage growth in the future. Companies made huge profits last year, with the weak yen particularly affecting exporters such as Toyota Motor Corp. helped, which achieved record corporate profits. But the yen has generally started to rise against the dollar as the interest rate differential between the US and Japan narrows. The currency effect and slowing growth in the US and China could undermine Japanese companies’ profits, making it harder for companies to make big wage increases.
Another concern is that smaller companies under severe pressure from ongoing inflation may not be able to make the wage increases. During this year’s wage negotiations, 60% of small and medium-sized businesses surveyed that planned to forego wage increases cited financial constraints.
According to Rengo’s final figure, companies with fewer than 300 employees have implemented wage increases of an average of 4.45% in 2024. According to local media, the federation is urging these companies to implement wage increases of at least 6% next year to reduce the pay gap with larger companies.
Japan’s chronic labor shortage will likely continue to contribute to wage growth. The unemployment rate has been below 3% for more than three years, the lowest level among developed economies. A significant percentage of companies that increased wages this year cited the need to attract and retain talent as the primary reason for that decision.
But with financial resources tight, companies facing staffing constraints may struggle to increase 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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