Rising costs and omicron could hurt Kishida’s hopes for wage hikes

Prime Minister Fumio Kishida is counting on companies to raise wages to accelerate wealth redistribution, the centerpiece of his push for a new form of capitalism, but his plan faces multiple hurdles heading into 2022.

Companies will need to not only factor in a recovery in their earnings from the COVID-19 pandemic but also heftier energy and material costs and the unknown impact of the omicron variant when annual shuntō labor-management wage negotiations begin in the spring.

Wage growth is critical for consumers to step up spending and rejuvenate the world’s third-largest economy, analysts say. Increased consumption should make companies feel more comfortable about raising prices and help the Bank of Japan as it struggles to fire up inflation toward its elusive 2% target.

“It’s important to use all possible means to create a mood in which companies want to raise wages,” Kishida said at a recent news conference. The prime minister is calling for a pay hike of over 3% by companies as long as their earnings have recovered to pre-pandemic levels.

Kishida is not the first Japanese leader to set a numerical target for wage hikes. Shinzo Abe, who stepped down in 2020, urged business circles to raise wages and called for a 3% increase ahead of 2018 wage talks.

“Listed companies such as exporters that have seen robust earnings are expected to offer higher pay when consumer prices are rising. But pay hikes won’t be across the board,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.

Wage growth remains tepid in Japan even after rebounding from a recent low of 1.63% among major companies in 2003. Such companies agreed to an average 1.86% pay hike in the 2021 negotiations.

Meanwhile, Japan’s labor productivity continues to be low, a longtime problem that has kept wage increases to a minimum. In 2020, the country ranked 23rd among the 38 members of the OECD in terms of labor productivity, or output per worker hour, according to Japan Productivity Center data.

In a recent speech, BOJ Gov. Haruhiko Kuroda said that inflation should come with wage growth and that companies seeing labor productivity improve tend to raise wages.

Without strong wage growth, households would feel more pain at a time when inflation is picking up due to higher energy and raw material prices as well as a weak yen inflating import costs, economists say. Some food companies have decided to raise prices to offset cost increases and analysts are watching for any impact on broader consumer sentiment.

In November, the core consumer price index, excluding volatile fresh food items, increased 0.5% from a year earlier, marking the sharpest gain since February 2020. Based on the BOJ’s projections, the core CPI will likely rise 0.9% in the current fiscal year from April.

The shuntō wage talks between management and labor unions at major Japanese companies are usually settled in March ahead of the start of the new fiscal year.

In the 2022 negotiations, wage growth is expected to pick up to 1.98%, short of Kishida’s requested level, said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Japanese firms are often cautious about raising base pay because doing so will increase fixed costs. Pay cuts are difficult once salaries are raised. Instead, management would rather reward employees with higher bonus payments when earnings improve, analysts say.

“Pressure from the political side on the corporate sector to raise wages was stronger during Abe’s time than now,” said Toru Suehiro, a senior economist at Daiwa Securities Co. “The point is that the pace of recovery from the COVID-19 pandemic still varies and service providers won’t be able to agree to pay hikes just because their business environment is expected to improve.”

Uncertainty over how serious the omicron variant is and its potential impact on the economy may leave companies in a wait-and-see mood.

“Companies have to be confident about the outlook when they raise base pay. A sense of uncertainty is what keeps them from base pay hikes,” Kodama said.