Wage Increases for Japanese Retailers

By Makiko Yamazaki and Kentaro Sugiyama

TOKYO (Reuters) – Japan’s retailers, typically among the most tight-fisted of employers, are offering big pay increases for a second consecutive year, resulting in squeezed profits for companies, more spending money for workers, and a green light for additional central bank rate hikes.

Japan’s labor-intensive service sector had long avoided significant pay raises by utilizing a vast pool of part-time, lower-paid retirees and housewives. However, this began to change last year due to a rapidly shrinking working-age population and rising inflation, making it increasingly difficult for retailers—who employ 10% of Japan’s workforce—to attract and retain staff.

Their acceptance of successive wage hikes marks a breakthrough among low-wage service businesses and small manufacturers, drawing the attention of policymakers, including central bankers eager for signs of lasting wage growth after 25 years of stagnation.

“There was a lot of positive talk on the wage outlook,” Bank of Japan Governor Kazuo Ueda stated at a gathering of regional bank executives recently, referencing a meeting of BOJ branch managers the prior week.

The central bank’s latest interest rate hike cycle, including another expected at a policy meeting later this week, is based on a sustainable “virtuous circle” of wage growth that supports higher prices for both services and manufactured goods.

UA Zensen, a union representing retail, restaurant, textile, and other industries, aims for a 6% wage increase for full-time workers and a 7% increase for part-timers in 2025, surpassing the baseline 5% target set by Rengo, Japan’s largest union.

Wage negotiations typically conclude around March, with new increases effective within a few months.

Economic Perspectives

“Substantial wage hikes will assist in placing the Japanese economy on a growth trajectory,” remarked Tamon Nishio, UA Zensen’s general secretary. “Many of our members come from small and medium-sized firms and are part-time workers. We wish to see wage increase momentum spread broadly to achieve real wage growth and a positive cycle for the economy.”

Economists and executives, however, point to several concerns surrounding this momentum, including rising costs for retailers and the uncertainty of whether workers will choose to spend their increased earnings.

“The large pay hikes will enhance our cost burden,” noted Takaharu Iwasaki, president of Japan’s largest food supermarket chain, Life Corp. “Yet, with the growing competition to hire and retain workers, we aim to reward them with competitive pay.”

The company plans for wage hikes in 2025 similar to the previous year’s 5% for regular employees and 6% for part-timers. Retail giant Aeon also considers raising hourly pay for its 420,000 part-timers by 7%, matching last year’s rate.

“We aim to continue increasing pay mainly for part-timers, consistent with our approach in previous years,” stated Executive Officer Motoyuki Shikata during an earnings call on January 10. “Feedback from field managers indicates that recent pay hikes have contributed positively to hiring efforts.”

Challenges Faced by Retailers

These wage increases are beginning to impact retailers’ financials. At Life, labor costs rose by 7.9%, and net profit decreased by 3.4% over the nine months leading up to November. Aeon reported a net loss during the same period due to wage hikes increasing its labor costs by 42.7 billion yen ($270.6 million).

Retailers are responding as Japan’s working-age population continues to decline from its peak of 86 million in 1995. A government think tank anticipates that the population aged 15 to 64 will decline by about 20%, to 62 million, over the next two decades. The pool of potential part-time female and older workers is also shrinking.

Moreover, doubts linger regarding whether wage increases will lead to higher consumer spending, particularly as inflation often outpaces wage growth. Without elevated spending, companies may find it challenging to raise prices.

“Retailers are raising wages to retain workers, but it is uncertain if they can maintain this trend beyond this year,” cautioned Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting. “Consumers accepted a degree of post-pandemic price increases, but signs indicate they are growing weary of continuous price hikes and are shifting to discount stores.”

Indeed, workers do not seem inclined to spend.

“Our mindset about saving is strong; I don’t think increased pay will significantly change spending patterns,” shared Miwako, a part-time worker at a major supermarket in Tokyo. While optimistic about future pay raises, she plans to save any additional income rather than spend it.