Why Japan’s ‘shunto’ wage hikes may not work over 80% of its workers

Japan is likely to see the biggest wage hikes in 33 years, following “shunto” negotiations that prompted the country’s central bank to raise interest rates for the first time in 17 years, in hopes that wages higher levels would fuel domestic demand and boost inflation.

But will the “shunto” increases really work for its legions of employees?

The first estimate from the Japan Confederation of Trade Unions, or Rengo, indicated that its seven million members would receive 5.28% pay increases in fiscal 2024, including a 3.7% base pay increase. .

Union workers set to benefit from the pay increase made up just 16.3% of Japan’s workforce — a record high — as of June 2023, according to the International Labor Foundation of Japan.

However, headline inflation, which has been above the Bank of Japan’s 2% target since April 2022, is hitting the entire population.

This means that the generous wage increase negotiated by the unions leaves out almost 84% of the Japanese workforce.

Richard Kaye, portfolio manager at asset management group Comgest, told CNBC in an interview last month that it was “important to keep in mind that the shunto only covers a fraction of Japanese workers, it does not reflect the overall inflation situation in Japan.”

Recent wage negotiations are also expected to mainly benefit workers at large Japanese companies, while employees at small and medium-sized companies may face rising prices without a commensurate increase in their wages.

The JILF report also found that unionized employees mostly came from large companies: companies with 1,000 or more employees had 39.8% of their workers unionized and accounted for 67.3% of total union members in the country. .

In contrast, companies with 100 to 999 employees had only 10.2% of unionized workers, while for companies with fewer than 99 employees the rate was 0.8%.

A survey of 4,527 companies conducted by credit agency Tokyo Shoko Research between February 1 and 8 found that 85.6% of Japanese companies plan to raise salaries in 2024.

However, there is a difference of 8.2 percentage points between large companies (93.1%) and small and medium-sized companies (84.9%), “which indicates increasing polarization due to differences in their capacity to increase wages and profitability”, according to the survey. .

“I speak every day with companies that are trying to raise prices in Japan. In fact, the picture is not as clear as some suggest… 80% of Japanese people work in companies that, for various reasons , really can’t raise wages that much,” Comgest’s Kaye said.

On March 14, Reuters reported the case of trucking company owner Ikuko Sakata, who said that despite a tight job market and rising demand, she could “barely afford to make ends meet.” » due to inflation.

The Tokyo-based company she runs pays its nearly 80 employees the minimum wage, a base salary of about 280,000 yen ($1,900) per month before overtime, the report added.

Indeed, to be able to raise wages, small businesses will have to pass on the costs, which could mean a loss of business from customers or large companies that contract them. “We try to negotiate price increases, but they are never fully respected,” she said. “At best it’s 50%, and most of the time it’s 20 to 30%.”

However, Kei Okamura, Japanese equity portfolio manager at Neuberger Berman, has a slightly different view. He said that while the increases are now being seen in larger businesses, there will be a trickle-down effect that will benefit smaller businesses.

“Obviously, large-cap exporters will be the first to benefit, given that the weakness of the yen contributes to their financial results and, therefore, they will be able to pay more for their salaries… (but) if large caps If we start at this pace, we should see this (wage hikes) trickle down to small and mid-sized companies.”

Okamura also pointed out that the current Kishida government is also “very keen” to get large companies to respond to small-cap companies’ negotiations to pass on costs, which could help smaller companies raise prices and, through consequently, the salaries of their employees.

Rising wages are expected to trigger a virtuous cycle in which people are likely to spend more, fueling consumption and pushing up prices in an economy that has suffered from deflation for decades.

A virtuous circle should lead to sustainable growth in the Japanese economy, which has been in the doldrums since 1990, when the asset bubble burst.

According to World Bank data and CNBC calculations, Japan’s average GDP growth between 1990 and 2022 stood at 0.94%, compared to average global GDP growth of 2.91% over the same period. .