Large firms across Japan are likely to issue a 5% wage hike on average in 2025, promising to ensure the wage growth momentum also spreads to smaller firms.
The new year begins with a big bonanza in Japan, as the country’s biggest business lobby Keidanren and trade unions began their annual labour talks on Wednesday. These talks are likely to lead to the second consecutive year of a major wage raise for Japanese workers, although policymakers are said to focus on how this could affect smaller firms.
Some of the biggest firms in Tokyo have already pledged to substantially increase wages this year. It was reported in early January that, like last year, large firms across Japan are likely to issue a 5% wage hike on average in 2025, promising to ensure the wage growth momentum also spreads to smaller firms. This wage hike can be seen as support for the Bank of Japan’s (BOJ) plans to increase interest rates the following week. BOJ has stated that if borrowing costs are to rise, a sustained wage hike is necessary.
Takeshi Niinami, Chairperson of Keizai Doyukai, one of the country’s biggest business lobbies believes that while the growth rate of big firms is likely to remain constant, it is the small and midsized enterprises (SMEs) that must achieve a consistent wage increase for the next three years. The Japan Centre for Economic Research, a private think tank estimates that this year union wage hikes will be around 4.74%. The country’s largest union, Rengo estimated that the 5.1% wage hike which companies had agreed to in 2024 is the largest increase in the past three decades.
Although this year’s expected figure is slightly lower than last year’s, it is considered a considerable increase for a country where steeping inflation and labour shortages mounted as pressure on firms to increase the pay of their employees.
Rengo is committed to seeking at least a 5% wage raise this year while targeting at least a 6% increase for workers in smaller firms. This is in order to minimise the income gap between small and large firm employees. Japanese unions are working to protect small and medium-sized firms and non-regular workers who account for 70% and 40% of the total workforce respectively and are ensuring that these workers are paid a higher amount in monthly compensation.
In Japan, 10% of the workforce is employed by retailers who had managed to underpay their workers for many years by relying on a large section of part-time, lower-paid retirees and housewives. However, retailers were finding it more and more difficult to keep their employees as the working-age population began to dwindle and inflation rates kept increasing. Policymakers could no longer ignore the demand of these retail employees for increased wages, which brought to their notice the frustration that seeps into a population that has not seen any major salary hikes in over 25 years.
BOJ Governor Kazuo Ueda has said that a sustained increase in wages along with increased interest rates by the country’s central bank will result in a virtuous cycle for the manufacturing and service industries which will be benefited by higher prices.
While there is much optimism from Tokyo officials regarding the economic growth as a consequence of increased wages, academicians are raising concerns that there is no certainty that wage hikes would translate into increased spending. Inflation can also increase more compared to the average wages thereby making it more difficult for producers to increase prices for goods and services.
Along with this, there are also concerns regarding the capabilities of smaller firms to pay higher wages. Small Japanese firms are spending a far higher percentage of their profits on wage compensation compared to their larger peers. While the primary goal of the wage raise momentum was to bring smaller Japanese firms into the fold, there is still considerable doubt over how this can translate into reality.
