BUSINESS / ECONOMY | LONGFORM

Unpacking Japan’s great wage conundrum
With inflation running at a four-decade high, the world’s third-largest economy’s famously
stagnant salaries are finally showing signs of rising. Can the momentum be sustained?

Japan’s stubbornly static wages have been one of the greatest mysteries in the nation’s shrinking labor market. | REUTERSBY ALEX K.T. MARTIN

Feb 20, 2023

STAFF WRITER

Pressured by rising prices and a labor crunch, Atsushi Tanaka has succumbed to what
the administration of Prime Minister Fumio Kishida has been pushing for: wage hikes.

In March, the president of a medical parts manufacturer will be raising the monthly
salaries of his full-time workers by ¥15,000 ($114) while also increasing the hourly wage
for his part-timers.
It wasn’t an easy decision to make for Tanaka, whose family-owned company is based in
Ibaraki Prefecture, northeast of Tokyo. Raw material prices have been rising and soaring
energy costs have seen electricity bills double at his factories. With more than 100 fulland part-time staff on the roster, the pay hikes will cost Tanaka’s firm, Sanetsu, an extra¥20 million or so annually.
“It’s the first time we’ve raised the base pay for all our employees at once by this much,”says Tanaka, who took over the reins of the four-decade-old business from his father two
years ago. “But it can’t be helped under these circumstances.”
With core consumer inflation hitting its highest levels in 41 years, there are signs that theworld’s third-largest economy’s famously stagnant wages are finally starting to rise.
But in a country entrenched in a deflationary mindset and where job security has beenprioritized over pay for decades, whether or not the momentum lasts depends on
addressing structural and demographic issues hindering labor market flexibility and thewillingness of smaller firms such as Tanaka’s to bet on the long-term advantages of wage
hikes.

(https://www.japantimes.co.jp/wp-content/uploads/2023/02/np_file_210308.jpeg)

Japanese firms have long been reluctant to pass on costs to budget-minded consumers, which in turnhave led to wages being subdued. | BLOOMBERG

Deflationary mindset
Japan’s stubbornly static wages have been one of the greatest mysteries in the nation’s
shrinking labor market, a puzzle that leaders past and present have tried and failed tosolve.

Speaking to lawmakers in January ahead of the annual spring wage talks between labor
unions and companies, Kishida asked firms to raise wages above the 4% inflation rate inan effort to fuel consumer spending and, by doing so, lift the economy still recoveringfrom the pandemic.
“We will promote labor market reform in order to build a structure for sustainable wage
increases on the foundation of the economic growth that has been steadily built up todate,” Kishida said. “First of all, wage increases that exceed price increases must be
achieved.”
Outgoing Bank of Japan Gov. Haruhiko Kuroda, meanwhile, has been stressing the needto maintain the central bank’s ultraloose monetary policy until wages rise sufficiently
and inflation sustainably hits its 2% target.
Japan is not the only developed country where real wage growth has been suppressed inrecent decades. Nevertheless, its sluggish pace stands out. In dollar terms, the averageannual pay in Japan stood at $39,711 in 2021, well below the Organization for Economic
Cooperation and Development average of $51,607 and nearly unchanged since 1997,
when it hit $38,395 before flattening out.
That was also the year of the Asian financial crisis following the burst of Japan’s asset
price bubble in the early 1990s. As the economy tanked, labor costs increased and firms
were forced to repress wages.
Up until the 2000s, however, Japan’s salary levels were still high by international
comparison, says Hisashi Yamada, a senior economist at the Japan Research Institute.
Wage hikes, meanwhile, also risked putting Japan at a competitive disadvantage withrising economies such as South Korea and Taiwan and encouraging a shift of production
to China.
However, the environment changed during the 2010s as firms’ labor cost ratios began
declining. At the same time, massive monetary and fiscal stimulus programs
spearheaded by former Prime Minister Shinzo Abe and the BOJ saw the strong yen
corrected and dollar-denominated wages fall. Annual wages in Japan have now slid
below those of South Korea on a purchasing power parity basis.

(https://www.japantimes.co.jp/wp-content/uploads/2023/02/np_file_210310.jpeg)

Apparel giant Fast Retailing has said it would raise wages by as much as 40% for full-time employees
from March. | BLOOMBERG

With the nation’s lifetime employment model — that ensured generations of workers
financial stability — crumbling, there’s growing concern that wage restraint will induce
an exodus of talented human resources overseas and, in turn, reduce the international
competitiveness of Japanese firms, Yamada says.
“There’s no more reason why wages shouldn’t grow, but strangely they haven’t — it
defies economic logic,” he says.
What has been hindering a spike in payrolls, then, is likely to be Japan’s decadeslong
deflation and a deeply ingrained deflationary mindset.
Japanese firms have long been reluctant to pass on costs to budget-minded consumers,
which in turn has led to wages being subdued. That has led to the proliferation of ¥100
shops and cheap fast food joints, for example. Even amid the early stages of thepandemic, when costs began rising, stimulus measures such as cash handouts and zerointerest loans saw inflation barely budge.
But the combination of higher energy and raw material prices, the war in Ukraine andthe weaker yen are finally forcing a change.
Cooking oil, frozen foods, diapers, highway tolls and electricity bills, to name a few, haveall gone up and further widespread price hikes for more than 10,000 products are on thehorizon this year. This has put the brakes on domestic consumer spending, with themost recent government data from December showing household spending having
fallen 1.3% from a year earlier.
The key, then, for what Kishida describes as a “virtuous cycle of growth anddistribution,” is for firms to invest in wages so consumers can open their wallets.
“There are companies with strong earnings and impressive business performances,while corporations’ internal reserves have hit record highs,” Yamada says.

“We’re entering a phase in which businesses need to raise prices and wages to remaincompetitive and maintain employee motivation, and some are already doing so,” hesays. “But not all can adapt and act immediately, and that risks polarization.”

Bigger is better?
A growing list of Japan’s largest corporations is moving ahead to ramp up payrolls.
Apparel giant Fast Retailing, known for its casual clothing line Uniqlo, said it would raise
wages by as much as 40% for full-time employees starting in March. Beverage behemoth
Suntory Holdings is also hiking salaries, along with a score of major financial institutions
such as Nippon Life Insurance and Sumitomo Mitsui Banking.
The movement is not just limited to full-time employees. Aeon, Asia’s largest retailer,
said it will raise hourly wages by 7% on average from March for its 400,000 or so parttimers working in supermarkets and other stores operated by 147 domestic units. The
firm is known for hiring the largest pool of part-timers in Japan.
“Our workers are the bedrock of our business, and are also members of local
economies,” says Kazuhiro Yoshida, a spokesperson for Aeon. “It’s important tomaintain their standard of living and to spur economic activity while also securing
skilled workers.”(https://www.japantimes.co.jp/wp-content/uploads/2023/02/np_file_210306.jpeg)

Retailing giant Aeon has said it will raise hourly wages by 7% on average from March. | REUTERS

But whether the trend can include small and midsize firms that account for 99.7% of all
businesses in Japan remains unclear.
These companies employ around 70% of the working population and are responsible fora large portion of economic output. They are the cornerstone of the service sector andplay a critical role in the manufacturing and export supply chain, but are also the ones

bearing the brunt of soaring expenses and a chronic labor shortage in a shrinking, aging
population.
Pay hikes at these firms, economists say, are crucial in preventing rising prices fromdampening consumer spending.
According to a survey taken in December by Daido Life Insurance, however, only 34% ofaround 9,000 small and midsize firms that participated in the questionnaire said theywould be willing to offer wage hikes. Among them, just 15% are prepared to provide
salary hikes above the 4% consumer inflation rate.
In an ominous sign of what may lie ahead, market research firm Teikoku Data Bank said
in its January report that the number of firms that went bankrupt due to not being able
to retain their employees is increasing.
Among the 140 firms in the report that went belly up last year due to staff shortages, atleast 57 were directly due to workers resigning.
“A virtuous cycle in which rising prices trigger an increase in labor market fluidity andpush up wages may finally be arriving,” Teikoku Data Bank wrote in its report, citing
recent moves for wage hikes at major corporations. “However, the ability to raise wages
is limited to large companies with strong earnings, industry leaders with high market
shares and price control advantages, and companies that create added value with
proprietary technologies.”
Takayasu Otomo, a researcher at Teikoku who worked on the report, says that means
there will likely be more smaller firms that can’t afford to dole out better salaries toretain talent, leaving them further behind the competition.
“It’s something that needs to be closely watched,” he says.

Labor crunch
Sonoko Fukui’s very first paycheck as a caregiver at a nursing home for older residents
came to around ¥130,000 after tax — about the price of a mid-range laptop.
That was 17 or 18 years ago. She was straight out of vocational school and living with herparents in Aomori Prefecture.
That amount has barely budged. According to the results of a survey released in 2016 by
Aomori’s elderly welfare association, the most common starting salary for a certifiedcare worker in the prefecture was between ¥140,000 and ¥150,000 a month before tax.
“Wages and the cost of living are lower in the countryside so it’s hard to compare, but I
recall that my friends in Tokyo working part-time jobs were earning more than I did,”says the 37-year-old caregiver who now resides in the capital’s Bunkyo Ward.
Along with nurses and child care workers, caregivers are among the most sought after
occupations in the world’s most rapidly aging nation, but also among the more lowly
paid. And Japan’s seniority-based wage system isn’t helping, especially in a grueling job
with a high turnover rate.

According to the health ministry, the average monthly wage for both sexes in 2020 was¥293,000 for nursing home workers, ¥303,000 for child care workers and ¥394,000 for
nurses. That’s compared to the all-industry average of ¥352,000.

(https://www.japantimes.co.jp/wp-content/uploads/2023/02/np_file_210307.jpeg)

Nobuko Nagase, a professor at Ochanomizu University, says structural incentives are needed to prodsome segments of the country’s workforce toward higher paying jobs. | COURTESY OF NOBUKO NAGASE

Complicating the issue is how their wages rely on subsidies coming from tax revenue
and nursing care insurance premiums. Kishida, for his part, has been pushing for better
treatment of employees in the medical and welfare sectors, where many female, socalled nonregular workers are employed.
In response to the economic strain resulting from the protracted recession the country
experienced following the bubble’s burst, the nation’s leaders have pushed for reform
across the labor market.
These deregulations led to corporate cost-cutting and a growing pool of nonregular
workers, or those hired on a part-time or temporary basis who typically earn much less.
They now account for more than a third of the country’s workforce and have been cited
as one of the reasons for bringing down overall salaries.
“Most caregivers at elderly homes I’ve worked at are nonregular workers, and many areolder — some even in their 70s,” Fukui says. “They come and go, and care facilities arealways scrambling for staff to keep their operations running.”

Demographic dilemmaWith its working-age population shrinking, the government has been prodding more
women and older people to join the workforce to offset a fall in productivity.

While advancements have been made, there still lacks structural incentives to drive
them toward higher paying jobs, says Nobuko Nagase, a labor economics professor at
Ochanomizu University.
The tax and social security system favors low-earning homemakers, giving married
women an impetus to limit their paid employment, she says. Of the 27 million women in
employment in 2020, for example, 14.3 million were nonregular workers, most being
part-timers.
“There’s a deep-rooted belief in Japan that husbands should be breadwinners and wives
should stay home to look after the kids,” she says. “But that model is cracking, and there
are fewer women desiring to be housewives.”
In the long run, the wage conundrum plaguing Japan is a harbinger to a larger
demographic issue the nation will have to face in the decades to come.
Last year, over-75s accounted for 15% of the population for the first time, while thoseover 65 hit a record-high 29.1%.
The government estimates the share of the elderly population to reach 35.3% by 2040. By
then, the nation will likely face a shortage of 960,000 medical and welfare service
workers.

(https://www.japantimes.co.jp/wp-content/uploads/2023/02/np_file_210305.jpeg)

Takuya Hoshino, an economist at the Dai-ichi Life Research Institute, says low wages and employment
instability are linked to the country’s low birthrate. | COURTESY OF TAKUYA HOSHINO

Meanwhile, the number of newborns was the lowest ever in 2021, at 811,622. With astubbornly low birthrate, social security costs are bound to balloon for the working age
population in the years ahead.
“Low wages and employment instability are linked to the low birthrate, as it hinders the
incentive for workers to want families,” says Takuya Hoshino, an economist at the Daiichi Life Research Institute.

“When people are concerned about their livelihood, they tend to shy away from taking
further financial risks in the form of getting married and having children,” he says.
Case in point: Fukui, the caregiver, is in a relationship but has no plans to tie the knot or
have children.
“It’s difficult to commit to these things when your lifestyle is rather unstable,” she says.
Fukui now works at a retirement care facility in the capital three days a week, and spends
the weekends selling flowers from a small space she rents in her neighborhood at a
discounted rate.
“I’ve always wanted to be a florist,” Fukui says. But earning a decent profit fromarranging a bunch or two is getting harder in these inflationary times.
“Even the price of flowers is rising,” she says.

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