Japan's Wage Struggles

By Makiko Yamazaki, Leika Kihara and Kentaro Sugiyama

TOKYO (Reuters) – Japan's small firms are spending far more of their profits on wages than their bigger counterparts, which raises concerns about sustaining pay hikes vital for a consumption-led recovery. This is crucial for the Bank of Japan (BOJ) as it considers further interest rate increases.

While Japan has finally achieved some pay raises after years of stagnation, the uneven wage distribution complicates the BOJ's plans to raise interest rates from historic lows. Policymakers are now questioning if smaller firms, employing 70% of Japan's workforce, can keep up with wage demands.

Ito Tekko, a casting maker in Kawaguchi, has increased wages by over 11% in two years, but President Nobuhiro Ito is uncertain about the sustainability of further hikes, citing the need for substantial investment in equipment.

Concerns about sustainable wage growth, alongside potential U.S. tariff increases, may lead the BOJ to hold interest rates steady at its upcoming Dec. 18-19 meeting, preferring to reassess wage prospects for next year.

Japanese wages had been stagnant for decades until 2022 when rising raw material costs pressured firms to offer higher pay. While larger companies are signaling continued wage increases to attract talent, uncertainties loom for small firms that lack competitive advantages.

Currently, small and midsized enterprises (SMEs) spend about 70% of their profits on wages, significantly higher than the 40% for large corporations. A Japan Chamber of Commerce and Industry (JCCI) survey revealed that while 68% of SMEs raised wages, many did so out of necessity to retain workers rather than due to improved earnings.

Kazuaki Kojima from JCCI noted that many SMEs struggle to pass on labor costs compared to other rising costs, making wage increases challenging and unsustainable. BOJ board member Toyoaki Nakamura expressed doubts about the sustainability of wage growth given the weak profitability of SMEs.

Prime Minister Shigeru Ishiba is facing challenges with rising living costs affecting household approval ratings and has promised a plan to raise Japan's minimum wage by 42% by the end of the decade.

A survey indicated that small firms agreed to a 4.45% wage hike this year, lower than the 5.19% agreed upon by larger companies. Labour union group Rengo aims for a 6% wage hike target for SMEs by 2025.

Ultimately, whether small businesses can meet these wage demands will be critical for BOJ Governor Kazuo Ueda's plans for continued interest rate increases. Ensuring wage growth across both small and large firms is essential for achieving the BOJ's 2% inflation target in a sustainable manner.