Japan's Biggest Wage Hike in Three Decades: Impact and Implications

Japanese companies have implemented the largest wage increases in thirty years, driven by labor shortages and inflationary pressures. According to the union group Rengo, workers' monthly pay will rise by an average of 5.10% this fiscal year. This wage hike is crucial for Japan's economic recovery and could signal an end to deflation.

Japanese companies delivered the biggest wage hikes in three decades this year, the nation's largest union said on Wednesday, prompted by labour shortages and an inflationary squeeze on household income. Workers' monthly pay will rise 5.10% on average this fiscal year, according to a survey of companies conducted since March by union group Rengo, which has about 7 million members.

The outcome of the "shunto" - spring labour negotiations - is seen as key for Japan as policymakers try to engineer a stronger and sustainable economic recovery, with higher household income and spending offsetting the drag on consumption from the rising cost of living. However, while big firms with 300 or more union-backed employees raised wages by 5.19%, small firms increased pay by a smaller 4.45%, it said.

More durable growth in the fragile economy could help policymakers put a decisive end to deflation and bring the Bank of Japan (BOJ) closer to further interest rate hikes as part of its efforts to normalise monetary policy. "The surveys have confirmed wages are rising overall. As inflation stabilises, higher wages are likely to help bring inflation-adjusted real wages into positive territory by the middle of this year," said Hiroshi Miyazaki, senior research fellow at Itochu Economic Research Institute.

"This is in line with our view that the central bank will raise interest rates in September." In mid-March, major firms said pay raises had accelerated to 5.28% - the biggest since the country's bubble burst in the 1990s. The BOJ then made its landmark decision to end negative interest rates and yield curve control policy.

With big firms' pay rises for this year a done deal, attention has now shifted to whether wage hikes may be spreading to small firms which are less able to raise prices for their customers to recoup rising input costs. About 70% of Japanese workers are employed by small and medium enterprises (SMEs).

"Small firms have struggled to pass on costs to clients (who were at the lower end of supply chain). We need to exert more efforts to help boost their pricing competitiveness and realise 5% of wage hikes next year for small firms as well," senior Rengo official Akira Nidaira told reporters. "We also hope the government steps up efforts to help stabilise prices and the currency so that more households can improve their living," referring to a sharp drop in the yen which has buoyed the cost of imports and inflicted more pain on households.

As part of efforts to address the wage gap, Prime Minister Fumio Kishida's administration has vowed to raise the minimum hourly pay to 1,500 yen ($9.27) from around 1,000 yen on average by the mid-2030s. ($1 = 161.8300 yen)

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