Inflation, labor crunch prodding Japan’s smaller firms to raise pay

TOKYO  – Rising inflation and an intensifying labor crunch are prodding smaller local Japanese firms to follow their big counterparts in raising pay, a move that can generate broader wage hikes and encourage the central bank to phase out its massive stimulus.

Wages have barely risen in Japan since the asset bubble burst in the 1990s but have crept up recently, as companies face pressure to compensate employees for the rising cost of living.

Importantly, smaller firms are also starting to raise pay even as many of them face a margin crunch. A durable rise in wages is an important consideration for policymakers who seek to foster sustainable demand-driven inflation in the world’s third-largest economy before starting to unwind monetary stimulus.

Huis Ten Bosch Co is just the kind of company that policymakers would want to see more of to stimulate a virtuous cycle of wages, prices and economic growth.

The theme park operator in southern Japan unveiled a plan last month to hike pay by 6 percent in the financial year 2024 – a rare move to pre-empt wage hikes for the next year.

“Customers have returned to pre-pandemic levels. Moreover, we want to give staff a sense of security in the face of rising living costs,” Yu Ito, spokesperson at the park operator’s president office, told Reuters.

“We want to keep the positive momentum going.”

Nearly 60 percent of Japan’s small and medium enterprises (SMEs) plan to lift wages this year with about 20% aiming for a hike by 4 percent or more, a survey by the Japan Chamber of Commerce and Industry showed in March.

Even those unable to hike basic pay sought to compensate employees with higher bonus payment.

Suzette Holdings Co, a high-end confectionary maker in the western city of Ashiya, which runs more than 100 shops nationwide, has offered bonus this year that is 1.3 times the average of the previous two years as sales returned to pre-COVID levels.

“We want to reward employees by raising wages for as long as possible so that we can attract talent,” company president Goki Arita said.

Big firms offered pay hikes of 3.8% this year in annual wage talks with unions that ended in March, the largest increase in three decades. Attention has now shifted to whether small firms, which employ seven out of 10 workers in Japan, would follow suit.

Bank of Japan (BOJ) officials have said the outcome of small firms‘ wage talks, which will get into full swing towards June, will be key to whether Japan will see durable pay hikes to enable it to phase out its massive monetary stimulus.

“Many regions said wage hikes were broadening, even among small and mid-sized firms due to intensifying job shortages and rising inflation,” the BOJ said in a summary of a meeting of its regional branch managers earlier last month.

Not all on board

There is uncertainty, however, on whether SMEs can keep raising pay. The BOJ’s tankan business sentiment survey showed last month that small firms‘ current profits fell 2.7 percent in the last fiscal year to March, while big firms‘ earnings rose 11.5 percent.

Hosei University Professor Hisashi Yamada, an expert on labor issues, said the wage hikes may turn out to be temporary, “therefore, the central bank may wait to see until next year and beyond to do anything drastic on policy.”

The jobless rate remained tight at a three-decade low of 2.3 percent on average in 2023, according to data by the International Monetary Fund (IMF).

Per-capita labor productivity is estimated at 5 million yen ($37,408.35) for SMEs, far less than big firms‘ 12 million yen, government data showed.

Many Japanese firms face the need to raise wages to retain talent amid dwindling pools of workers in the fast-ageing population, though some may not have the capacity to do so with rising raw material costs crippling their margin.

“Medium-to-long term inflation expectations and ability to pass on costs to bigger firms at higher end of the supply chain are important factors for SMEs to raise wages,” Yamada said.

Less than half of small firms said they were able to pass on rising costs to customers as of last September, government data showed.

A fire-engine maker, Nihon Kikai Kogyo in the western suburban city of Hachioji in Tokyo, is among firms that are struggling with the persistent need to cut prices to win public tender.

The company, mired in the red for two straight years, saw 10 of its roughly 160 workers quit last year due to declining bonus. It hasn’t been able to fill the headcount since then.

“Frankly, I don’t want to see wages declining any more. Once it was cut, it won’t be brought back again,” said Hironobu Yamaguchi, the firm’s union representative. “We will be in the clutch next year.”

($1 = 133.6600 yen)