For a generation of Japanese entering the workforce this year, their entire lives have been spent with three things stuck at zero: inflation, interest rates and the chances of the shunto “spring offensive” of wage demands being anything other than a crushing disappointment.
Companies in Japan have resisted raising prices by any means possible for the past three decades, helping to establish a mindset where inflationary expectations withered to nothing, and companies felt no shame in offering the nation’s workforce one of the lowest average wage increases in the OECD. Despite a shrinking labour force and a job market so tight that companies struggle to recruit everyone from waiters to software engineers, trade unions have gone along with it.
Suddenly, two years into a pandemic and with the prices of the nation’s favourite snacks rising for the first time since 1979 — along with energy and commodity prices — there is a sense of change in the air. And optimism that the newest members of Japan’s workforce will be on hand to enjoy the first shunto in decades to actually make a difference.
Inflation has averaged an annual 0.3 per cent over the past 30 years but is tipped to reach 1.1 per cent in 2022. Not high by global standards, but huge in Japan, and company bosses, union leaders, analysts and economists say that could weigh heavily on the shunto — four weeks of talks between big employers such as Toyota and Sony, and the unions — that are set to begin.
“Calls for wage hikes will likely get a lot more shrill” as the talks progress, says Nicholas Smith, CLSA Japan strategist. Crucially they have government backing, with the administration of Prime Minister Fumio Kishida actively encouraging wage rises of more than 3 per cent.
“Wages in Japan peaked in 1997 and have barely grown since then, and are now among the lowest in the developed world,” Tomoko Yoshino, the newly appointed head of the nation’s largest labour union association, Rengo, told members ahead of the pay talks. “Wages have not kept pace with the growth in productivity, and it is difficult to say that they have been distributed appropriately to workers.”
Yoshino, who became the first female Rengo boss last year, has encouraged all its member unions, representing 7mn workers, to push for wage rises. At the same time the country’s biggest business lobby, the Keidanren, which in 2021 described “blanket pay hikes as unrealistic”, is now urging member companies recovering from the pandemic to raise pay.
Uncertainty over any new coronavirus variants may yet curb wage increases. But Kishida senses a historic opportunity, say officials who work closely with him. His predecessor Shinzo Abe gave his name to a clutch of economic reforms, Abenomics, which, among other unfulfilled ambitions, had hoped to secure a sustainable culture of wage rises without which it is difficult to boost consumption and grow the economy.
In 2013, Abe convinced companies to raise wages above the level demanded by unions, achieving a 2.4 per cent rise in 2015, but its one-off nature caused people to sneer that it was a government-manufactured shunto.
Kishida, who has pitched himself as the architect of a “new capitalism”, hopes the current circumstances — a tight labour market and diminishing immunity from inflationary pressures — will allow him to preside over a more identifiably organic shunto success story and push inflation closer to the Bank of Japan’s long-held 2 per cent target.
“Kishida is pushing this ‘new capitalism’ agenda with a focus on redistribution of wealth,” says Atsuo Ito, an independent political analyst. “Wage increases are very important for this plan to succeed.” The success of the ruling Liberal Democratic party in upper house elections in the summer might hinge on what happens over the next few weeks, he adds.
Ito has dubbed the upcoming season the “spring of price hikes” but warned that it will be “very difficult” for unions to “secure wage hikes that could offset inflation on this scale”.
Closing the gap between rich and poor
The circumstances are ideal, it seems, for labour to become more assertive in Japan. Kishida has, in his five months at the helm, repeatedly talked about “distribution” — a still vaguely explained policy position that appears at odds with the “trickle-down” ideology behind Abenomics.
“The current situation is based on a major fundamental policy difference between Abe and Kishida on the issue of fiscal stimulus, and one clear example of how Kishida is distancing himself from Abe is the shunto,” says Takao Toshikawa, a political analyst.
Kishida has vowed to abandon “shareholder capitalism” and promote his vision of a more inclusive Japan, becoming the first prime minister in almost a decade to attend Rengo’s new year party. There has been speculation among business leaders — denied by officials — that the government could withhold public sector contracts from companies that are too stingy with wages.
To advocates, Kishida’s distribution talk is a signal that the LDP has at last acknowledged that there is something inherently wrong with a system — in the world’s third-largest economy — that has failed to deliver serious wage rises. Real wages have risen just 0.39 per cent since 2000 and South Korea now outstrips Japan in average pay, according to OECD data.
Both the national government and central bank have, for the better part of three decades, attempted to address deflation and bring sustainable growth to an economy where consumer spending accounts for over half of gross domestic product.
When those policies have fizzled, their failure has been explained as the result of structural shortcomings. Some critical ingredient has always been missing from a huge larder of factors that includes higher real inflation, more liquid labour markets, genuinely disruptive politics, more assertive unions or lower savings rates, even when other parts of the mix seemed about right.
This time, say both analysts and labour leaders, there does appear to be a critical mass of pressures — including bumper profits for companies and rising living costs for workers — driving demand for wage rises.
Japan’s official consumer price inflation in December stood at 0.5 per cent — which has allowed some to argue it is immune from the sorts of rises seen in the US and Europe.
But it has been held artificially low by massive price cuts that the government in effect forced on mobile phone companies to woo younger voters 12 months ago. From March, year-on-year comparisons in the CPI will have moved beyond that price-cut blip, producing a potentially eye-catching inflation figure that will feed into this year’s pay talks.
The massive shrinkage in the working-age population, now declining at about 550,000 per year, is another factor. Pre-pandemic, those numbers were partially offset with large-scale immigration that amounted to roughly 200,000 new entrants every year.
Since Covid-19 hit, Japan’s border controls have made it nearly impossible for companies and entire workforce-hungry sectors such as nursing and retail to bring in large numbers of foreign workers. Although the government has indicated a tentative reopening, it is unclear when, or if, foreign workers will return in similar numbers.
Japan’s job market figures continue to reflect extraordinary tightness. There are 116 jobs available for every 100 applicants. CLSA’s analysis of the Bank of Japan’s quarterly surveys of business sentiment shows companies reporting labour shortages at levels equivalent to the years during the peak of the late 1980s bubble.
The political tailwinds of Kishida’s “new capitalism” rhetoric and more assertive unions are combining to demand bigger wage increases and shedding the fear that the very act of doing so threatens the corporations that underpin the economy.
Large companies that raise wages 3 per cent or more and small businesses that increase them 1.5 per cent will be eligible for tax breaks under new government plans. Up to 40 per cent of wage increases could be deducted from corporate tax in some cases. Perhaps buoyed by this and conscious of how much more competitive the labour market has become due to Japan’s demographics, trade unions appear more assertive.
“We understand that the business environment is tough, but we’re still planning to push for a boost to base pay,” says Natsuki Sagara, a senior officer at the Japan Railways Rengo union which represents about 80,000 workers. “As the prime minister says, if we don’t increase wages of the workers it won’t be possible to reduce the gap between the rich and the poor.”
Uneven pandemic recovery
Yet doubts over the scale of this year’s wage rises remain, amid the threat of more Covid variants, companies’ worries over rising material costs and the labour unions’ poor record in pushing for higher pay.
That is especially true for hotels and transportation sectors, experts say, which are still licking their wounds after the pandemic. Their fate stands in sharp contrast with manufacturing, where operating profit in the July-September quarter grew more than twofold from the same period the year earlier.
“Providers of face-to-face services are struggling, especially in hospitality and travel where demand is well below pre-Covid levels,” says Stefan Angrick, senior economist at Moody’s Analytics. “[Yet], tech and manufacturing are benefiting from shifts in consumer demand and are outperforming.”
On top of that, some observers doubt whether the unions — which have historically emphasised collaboration over confrontation with companies to protect jobs — have the stomach for an aggressive push after years of compromises. Industrial action is almost unheard of.
“They don’t have the energy to fight,” says Shoichi Ibusuki, a lawyer who represents workers in labour disputes. “If the unions are weak, it doesn’t matter how many times the prime minister says he wants to see wage hikes of 3 per cent and more — it doesn’t carry.”
Unions working in transport or hospitality or other areas badly affected by the pandemic will be in a much weaker position to demand wage rises. And a recent government suggestion that Japan is moving to reopen the economy will prove too little too late for many companies to boost wages, say observers.
“I think coronavirus is still at the back of the minds of lots of companies because they can’t quite see the path towards recovery and the business environment remains uncertain,” says the political analyst Ito. “Because of that, I think there’ll be lots of firms that will be very cautious when it comes to wage hikes this year.”
Who pays for higher wages?
Japan, like many other countries, is still trying to determine whether inflation is a temporary phenomenon or here to stay. At the moment it can be traced back to a spike in fuel prices and supply chain bottlenecks. It doesn’t indicate that the Japanese economy has taken off, making companies reluctant to raise wages.
Companies warn that the long-entrenched deflationary mindset makes it near impossible to pass on the increases to consumers.
“In the US, inflation, including massively growing labour costs, is passed on to all the products, and retailers admit that as a natural thing. Australia and other countries too,” Yoshinori Isozaki, the chief executive of Japan’s beer group Kirin, told reporters on Monday. “But the strangest thing in the world is that is not possible in Japan.”
It is similar in the service industry, says Soichiro Ishikawa, the general secretary of the Japan Federation of Service & Tourism Industries Workers’ Unions who says that a prolonged deflationary mindset has held hotel managers back from increasing room prices and, as a result, boosting employees’ wages.
To help the reluctant corporations, Kishida has offered subsidies — additional to the tax cuts — to smaller companies unable to raise wages on their own. But Akihiko Matsuura, chair of UA Zensen, one of the biggest labour unions representing textile, garment and restaurant workers, dismisses the measures as ineffective.
“Wages are paid to workers over a long period,” says Matsuura. “I think only a few managers will raise them because of subsidies that can be removed at any time.”
The greater problem with using shunto, as a vehicle to boost wages, say labour experts, is that the negotiations involve only the largest corporations. At least 70 per cent of Japanese workers are employed by small and medium firms and more than a third are on contracts or work part time.
“If these workers’ wages don’t rise, you can’t expect consumption to grow — and that’s where wage increases are needed most,” says Ibusuki, the labour lawyer.
Even those arguing that shunto 2022 could be different acknowledge the heavy weight of history pulling against that. Labour market liquidity, though significant in certain sectors, remains low throughout much of the economy and companies, as seasoned hoarders of cash, may find themselves able to convince staff that long-term survival outweighs the immediate need to raise wages.
Hisashi Yamada, the vice-chair of the Japan Research Institute think-tank, says to consider the entire issue of wage increases as a balance between the unions, companies and government, is wrong. Japan’s long-term suppression of wage increases, he says, is the symptom of a system that prioritises maintaining employment above the fundamental vigour of the economy. And that the shunto will not break free from its long history of carefully choreographed disappointment.
“If you want to raise wages, you have to eliminate unprofitable businesses and increase profitable sectors, because the source of wages is profit, and wages will not rise otherwise,” says Yamada. “Japanese unions are reluctant to do so, because protecting employment at the same company is a major priority.
“The big picture has not changed in that sense,” he adds.
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