With global inflation at levels not seen since the 1970s, wage developments have taken on greater significance. In Japan, nominal wages increased by 2.1% in 2022, the largest rise since 1991. However, real wages, which take into account the impact of prices, fell 0.9% from the previous year, marking the first decline in two years. The question of whether wage growth will keep pace with price increases is an important factor in estimating the strength of Japan’s economic recovery.

In many Japanese companies, labor-employer negotiations on wages and the work environment take place before the fiscal year begins in April. These negotiations are carried out by labor unions under the Japanese Trade Union Confederation, the national center for labor unions in Japan, and are known as “Shunto,” or Spring Wage Negotiations. While the impact of these negotiations on overall wage developments in Japan is smaller than in the 1970s, the resulting management decisions on the wage increase, which are announced in March, still attract significant public attention as indicators of wage increases in the economy as a whole.

For this fiscal year, what will be the outcome of the labor-employer Spring Wage Negotiations?

The Consumer Price Index (CPI) climbed by 4% (yoy) in December and by an average of 2.3% for 2022. In response to these price increases, the confederation is requesting a base salary increase of about 3%, which is 1 percentage point higher than last year, as well as a regular salary rise of 2% during the Spring Wage Negotiations for Fiscal Year 2023. The total wage increase request would be about 5%, the highest in 28 years.

The recent demands for higher wages represent a significant shift that has not been seen in decades. Between 2002 and 2013, the Japanese Trade Union Confederation had asked for only one base salary increase, in 2008. Since 2014, raises had been sought for the base salary but these were limited to just 1 to 2%.

The rare push for significantly higher wages this spring, the first in a decade, has garnered public attention, particularly regarding its potential impact on small and medium companies or labor unions outside the umbrella of the Japanese Trade Union Confederation. It remains to be seen how these SME companies and labor unions will respond to the higher wage demands, which could mark a crucial turning point in corporate practices. Until now, companies have tended to avoid permanent wage raises by adjusting wages primarily through annual bonuses.

Nominal and real wages in Japan were the highest in 2000 and 1996, respectively, but have since failed to reach these levels again. The prolonged stagnation can be attributed to several factors, including a greater proportion of part-time workers in the workforce, a decline in labor share, and the weaker bargaining power of employees, all of which have suppressed wages for more than two decades.

The decline in workers’ bargaining power is partly due to the fact that most part-timers do not belong to a labor union. Additionally, the rate of labor union participation among full-time workers has continued to decline, leaving more than 80% of full-timers and 90% of part-timers with limited opportunities to negotiate wages with their employers. Another factor contributing to the muted demand for higher wages among workers in Japan may be the decades-long deflationary state of the economy.

Furthermore, during past economic downturns, workers were willing to prioritize job protection over more income, so their demand for higher wages was quite modest. Consequently, workers have made requests for only limited wage increases, and companies have avoided taking action that would drive up fixed costs, such as raising base salaries.

Now, in an effort to overcome these challenges, the government is strengthening policies to provide tax benefits to companies that take action to raise wages. This year will be a crucial time for determining whether real wages will finally begin to increase in response to growing demands from workers for higher earnings amid rising prices.

In Japan, a common joke is that bosses “hire six people to do the work of two”. This phenomenon has been possible due to low wages, but, except as an exigent measure during times of economic depression, have reduced the productivity of the economy. In fact, such a hiring practice can discourage companies from digitalizing their operations in a timely manner, thereby dampening productivity. Overstaffing in one or more sectors, particularly with a shrinking workforce, can be detrimental to the economy, particularly when some industries are facing chronic staff shortages with no signs of improvement. A steady rise in wages may incentivize companies to reduce excess staffing which would help improve productivity and make a significant impact on the country’s economic growth.