Consecutive increases in Japan's wages could pave the way for the Bank of Japan's exit

21 Nov, 2023

Consecutive increases in Japan's wages could pave the way for the Bank of Japan's exit

Major Japanese employers are poised to continue their trend of substantial pay hikes, extending the momentum into 2024 following this year's significant increases. Forecasts from businesses, unions, and economists suggest that the labor and cost pressures, setting the stage for the largest pay raises in over three decades this year, will persist into next year's crucial spring wage discussions.

Leaders of prominent companies, such as Suntory Holdings and Meiji Yasuda Life Insurance, are planning to implement average monthly and annual pay hikes, respectively, in 2024. Suntory Holdings, in particular, aims to offer a 7% average monthly pay raise for the second consecutive year to retain talent in a competitive labor market and offset rising inflation.

The back-to-back annual pay increases are viewed as part of a significant paradigm shift away from deflation toward inflation, according to Suntory Holdings CEO Takeshi Niinami. This shift is seen as essential to address the challenges posed by rising living costs on households.

Japanese Prime Minister Fumio Kishida is actively encouraging companies to raise pay to alleviate the financial burden on households due to increasing living expenses. The consecutive pay bumps are also anticipated to provide the Bank of Japan (BOJ) with a crucial precondition for rolling back a decade-long massive monetary stimulus: sustainable wage growth.

Experts predict that the chronic labor crunch and persistent inflation will likely result in equivalent or even higher pay raises during next year's wage negotiations compared to this year. While average wages in Japan have seen minimal growth over the past 30 years, recent global supply chain disruptions and inflation pressures have prompted a shift in this trend.

With inflation consistently exceeding the BOJ's 2% target, companies are under unprecedented pressure to compensate employees with substantial pay hikes to attract and retain talent. Trade unions, including Rengo and UA Zensen, are expected to demand significant pay increases in the upcoming negotiations.

Despite challenges, including uneven wage hikes among sectors and uncertainties in regional areas, Japanese policymakers are emphasizing the urgency of lifting wages. Prime Minister Kishida's efforts include subsidies, tax incentives, and support for small and medium-sized firms to enhance their bargaining power.

The consecutive years of robust wage growth are not only vital for Japan's economic revival but also play a pivotal role in the BOJ's strategy to end its monetary stimulus. Observers are watching key indicators like the BOJ's tankan business survey in December and wage talks in January for insights into the broader economic landscape and the potential success of sustained wage growth.