The 5.28 per cent wage bump that Japan’s largest trade union grouping, known as Rengo, announced on March 15 ends decades of disappointing shunto or spring wage talks, which take place annually in March.
At one level, Rengo’s agreement with Japan Inc will determine pay and working conditions for giants like Toyota Motor, Panasonic, Nippon Steel and myriad others for the new fiscal year starting in April.
But much higher national interests are in play here and as potential economic inflection points go, this could be a big one.
This year’s round carried the highest stakes in decades as record corporate profits collide with a fast-shrinking labour force and worker discontent over rising inflation.
The impact of the wage rise is also critical to getting Japan out of its economic doldrums.
Since December 2012, when the Liberal Democratic Party (LDP) returned to power, a succession of leaders have pledged to generate a “virtuous cycle” of pay gains to enliven household spending and defeat deflation once and for all, with little to show for it.
Will the biggest wage boost since 1991 break the spell?
The implications are already rippling through the world’s third-largest economy. The increase could give the Bank of Japan (BOJ) greater confidence to push interest above zero as soon as early this week. It also could help Prime Minister Fumio Kishida’s government get approval ratings above 20 per cent.
It’s only just begun
Yet it’s best to keep some of those champagne bottles on ice. For this is not the end of Japan’s revival. It’s just the beginning.
A lost-in-translation dynamic tends to bedevil overseas economists analysing Japan. Among the biggest: the relatively limited portion of the labour market that is, in theory, subject to shunto negotiations.
Only about 16 per cent of Japanese workers are formally unionised.
In 2023, for example, there was rapturous excitement following news of a negotiated 3.58 per cent wage boost.
“But as the months passed, it was clear that the 84 per cent of employees who are not unionised got substantially less,” says Mr Richard Katz, author of the new book The Contest For Japan’s Economic Future.
It hardly helped that “real” wages adjusted for rising inflation actually declined in 2023.
The hope is that the five most dangerous words in economics – “things are different this time” – will ring true in 2024 and beyond.
Japan Inc’s gambit is that the wage boom zeitgeist surrounding this year’s shunto talks will have a catalysing effect on the broader business scene.
Top-down Japan loves a precedent. That’s why Toyota’s announcement last week, two days ahead of the shunto results, that it would hike wages the most in decades received major coverage.
Trickle-down economics doesn’t work in Japan, a lesson that marred the legacy of Mr Shinzo Abe’s 2012-2020 premiership. But trickle-down corporate shame often does.
Will this year’s results shame the broader corporate system, especially small and medium-sized enterprises (SMEs) that employ 70 per cent of Japanese, to hike wages, too?
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Encouraging SMEs to boost wages via tax incentives is a particular priority.
“Where there is some scepticism and concern is the ability of SMEs to catch up,” says Ms Izumi Devalier, head of Japan economics at Bank of America.
“They have lower power, so the increase in labour costs is something that’s much more difficult to absorb. We need SMEs to be stronger because they represent about 70 per cent of employment.”
The key here, Ms Devalier says, is for Tokyo to “encourage more investments into labour-saving capital expenditures at the SMEs and the big firms too”. It remains an open question, she adds, “whether they could really implement improvements in efficiency”.
When Tokyo launched “Abenomics” 11-plus years ago, the plan was to fire three policy arrows in unison to slay deflation and reawaken Japan’s animal spirits.
Only the first arrow – monetary easing – was fully deployed. The second – assertive fiscal loosening – never quite got aloft.
The third and most important – structural reform – still largely remains in the quiver.
Sure, Mr Abe’s government introduced steps to strengthen corporate governance. Those upgrades, along with zero rates and Japan’s safe-haven status in a chaotic world, propelled the Nikkei index to 34-year highs.
Average wages, not so much. Until recently, workers’ pay in Japan had been virtually flat for more than a quarter-century.
A few shocks since the early 1990s paved the way for the compensation winter to come.
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China’s role in Japan’s wage woes
First was the trauma from the collapse of Japan’s 1980s “bubble economy” around 1990. Then came the 1997-1998 Asian financial crisis, during which then 100-year-old Yamaichi Securities collapsed.
But the biggest shock was China’s arrival as a regional economic superpower.
China’s rubber-hitting-the-road momentum was its 2001 entry into the World Trade Organisation. Since then, China has steadily transformed the global trade system to its benefit.
No economic model has been shaken more fully than Japan’s. In 2002, fear of losing business and competitiveness to low-cost China saw Toyota, Japan’s biggest company, refuse any pay scale increases despite having enjoyed record profits.
Toyota had always been a compensation trendsetter. Its no-wage-increase stance gave other behemoths political cover not to fatten pay cheques.
It also led to unions lowering their sights – and their demands.
Many, unwittingly or not, became tools of government wage suppression, turning shunto season into a “go through the motions” enterprise. This dynamic paved the way for over two decades of wage stagnation.
China’s competitive threat also helped catalyse the “informalisation” of Japan’s labour market.
Since the early 2000s, the number of so-called “non-regular” workers grew rapidly. Today, they make up 37 per cent of Japan’s workforce. Typically, non-regular staff don’t get the shunto rate.
This dynamic is slowly but surely denting Japan’s claim to being a uniquely egalitarian Group of Seven economy.
The disconnect between a stock market trading near 1989 highs and the majority of households not seeing a notable raise in eons widened the gap between the haves and have-nots.
All this has Mr Kishida’s team prodding non-union companies to offer pay rises in excess of 5 per cent. Only time will tell if he succeeds.
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Challenges ahead
Mr Kishida’s team must also act fast to incentivise increased productivity to avoid a sudden and giant surge in “demand-pull” inflation.
Thanks to a chronically weak yen and elevated global energy and food prices, Japan is awash in “cost-push” inflation.
Tokyo’s consumer prices rose at a 2.5 per cent year-on-year pace in February. Without urgent efforts to increase worker efficiency, the shunto increase could boost inflation rapidly.
The record is not reassuring. Sadly, one LDP government after another have chosen to muddle along, year after year, rather than implement much-needed reforms to make the economy more dynamic, Mr Abe’s especially.
His plans to cut bureaucracy, loosen labour markets, rekindle innovation, empower women and restore Tokyo’s place as Asia’s financial hub fell by the wayside in favour of aggressive BOJ stimulus.
Trouble is, the yen’s plunge since March 2013, when the BOJ supersized quantitative easing, did more harm than good. It took the onus off Cabinet ministers and lawmakers to raise Japan’s economic game.
The BOJ’s largesse freed many chief executives of pressure to recalibrate or reimagine industries and take risks.
Now, as the BOJ steps towards normalising rates, economists are mixed on whether the financial system is ready to live without BOJ cash.
This has some economists fearing the impermanence of this year’s wage gain. Despite the Nikkei 225’s epic rally this year, Japan barely avoided recession at the end of 2023. In January, household spending plunged 6.3 per cent from a year earlier, the sharpest drop in 35 months.
As Nobel laureate Milton Friedman argued, wage bumps transform consumer attitudes only if workers trust there are more to come, year after year.
The key here, says Mr Masashi Jimbo, president of the Japanese Electrical, Electronic and Information Union, is that “we must not make this wage hike just a one-off thing”.
Mr Kishida claims he’s determined to ensure just that. But his actions will speak much louder than words. Let’s start by putting some of that champagne back in the refrigerator.
The real heavy lifting is only just beginning.
William Pesek is a Tokyo-based journalist and the author of Japanisation: What The World Can Learn From Japan’s Lost Decades.
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