Japanese Workers Can Expect Smaller Raises This Year

(Bloomberg) -- Japan Inc. is pushing back after years of pressure to give bigger pay raises that has been a key part of Prime Minister Shinzo Abe’s campaign to restore stable economic growth.

While wages have never reached the level sought by Abe, the results from annual wage talks to be released later this week are expected to show even smaller gains after the chief of Keidanren, the nation’s largest business lobby, suggested the government mind its own business.

Higher pay that can drive a cycle of stronger consumption and price growth has been viewed as key to the success of Abenomics. That’s particularly critical this year, with a demand-sapping sales-tax increase scheduled for October.

Japanese Workers Can Expect Smaller Raises This Year

Facing public pressure from Abe and a labor shortage, companies have increased wage hikes in past years, but the gains have never reached the level economists see as necessary to boost inflation to 2 percent. Overall wage gains from spring negotiations reached a 17-year peak of 2.2 percent in 2015, according to data from Rengo, one of Japan’s largest union federations, but base pay only rose 0.7 percent.

Things are looking different this year after Keidanren chief Hiroaki Nakanishi said the government had overstepped the mark by putting a number on what raises companies should give their employees. Nakanishi, who took the helm of the Keidanren last year, said it is nonsensical for the government to take a leading role in wage negotiations that should center on talks between management and labor.

That’s a stark contrast from his predecessor, Sadayuki Sakakibara, who asked members in January 2018 to consider "positively" a 3 percent figure floated by Abe.

This year Abe didn’t suggest a figure for pay increases. Even the main union of Japan’s biggest company, Toyota Motor Corp., declined to give a public figure for their base wage demands, as talks entered a black box that doesn’t bode well for wage growth, the economy or the Bank of Japan’s efforts to boost inflation.

Unions Speak

Still, Rengo and most unions continued to call for specific base pay hikes, demanding a 2 percent base salary increase for a fourth consecutive year. Last year its members averaged a 0.54 percent gain in base pay as part of overall pay increases worth 2.1 percent.

Economists say base pay needs to increase by at least 3 percent to fuel the 2 percent inflation targeted by the Bank of Japan. Economists surveyed by Bloomberg News this month estimated base pay will be hiked 0.5 percent in this year’s negotiations, with 86 percent of them saying the gain won’t be strong enough to boost consumer spending.

Rengo is expected to release the results of negotiations on March 15.

“Thanks to risks from China’s slowdown and rising uncertainties, companies are going to be even more cautious about raising wages,” said Hiroshi Shiraishi, a senior economist at BNP Paribas SA. “The BOJ is likely to say gains are positive as long as there is an increase in base wages even by a small amount.”

What Bloomberg’s Economists Say

"While a better outcome for workers in spring wage negotiations could put inflation on a more sustainable footing, a drop in 4Q corporate profits is likely to slow the pace of base wage growth in 2019. That could be disappointing for the Bank of Japan."

Yuki Masujima, economist

©2019 Bloomberg L.P.