Annual pay increases at precision parts maker Fujiseiki Co. have been unremarkable in recent years, eliciting little interest beyond the employees who live atop its Tokyo factory.
(Bloomberg) — Annual pay increases at precision parts maker Fujiseiki Co. have been unremarkable in recent years, eliciting little interest beyond the employees who live atop its Tokyo factory.
But wage growth at such small Japanese companies is in the spotlight this year as the Bank of Japan looks for bigger wage gains that can sustain the price growth it seeks.
Japan’s large companies and labor unions are holding their annual wage negotiations, with initial conclusions due next week. After large wage hikes from companies such as Uniqlo-operator Fast Retailing Co. and automobile giant Toyota Motor Corp., and demands by Prime Minister Fumio Kishida that more businesses raise pay, there are expectations for the biggest wage gains in years.
But it’s the salary decisions at smaller companies like Fujiseiki without unions that will indicate how widespread the wage gains really are, and will therefore be watched closely by the central bank. Some 76% of all Japanese employees work for small companies with less than 1,000 workers.
The size of the pay hikes is expected to help determine when the BOJ, which has vowed to maintain its massive stimulus program until there’s steady 2% inflation, can start to pull back. Financial markets have been speculating that a shift may be in the works under the leadership of incoming Governor Kazuo Ueda.
But it remains uncertain if this year’s gains will be big enough to convince the BOJ that sustainable price increases are in sight.
“The pandemic stopped me from rewarding those who are learning and working so hard,” Fujiseiki president Masayuki Fujino said.
Kishida in October visited the small factory, which makes components for a range of manufacturers from chips to aircrafts, highlighting his interest in the country’s smaller enterprises.
There’s some good news from Fujino. With sales finally poised to top their pre-pandemic level and inflation hitting his employees, he is considering a 3-4% raise for staff. That appears to meet the 3% the BOJ says is needed to achieve lasting 2% inflation. But on closer scrutiny, the raise is likely a mixture of around a 1% increase in base pay and 3% to meet the scale for seniority-based pay.
Higher base pay immediately becomes a long-term cost in a country where labor norms make it difficult to cut pay, let alone terminate jobs. Yet economists say raising base pay is crucial to bolstering consumer confidence.
Last year’s final results showed just a 0.6% gain in base pay across Japan, according to the country’s biggest union federation Rengo. This year some 2,000 unions are seeking an average 2.83% increase.
Across town, pay raises are out of the question for supermarket PB Farm. Power bills have risen, due in part to a global energy crisis, and the shop is struggling to pass on wholesale food prices to customers, many of whom are senior citizens on pensions.
That’s cutting profits and leaving no room for 54-year old president Tsuneki Kiyono to reward his staff of eight. Six of them are part-timers who get paid the minimum hourly wage of 1,072 yen ($7.88).
“I’d like to say to them, ‘Why don’t you do it?’” he said, expressing frustration at authorities pushing for pay raises.
His predicament speaks to a common challenge among smaller companies. Many hesitate to raise prices as consumers, after years of deflation, often turn elsewhere for business when there’s a markup. As of the last quarter of 2022, Japanese firms were passing on less than half the higher costs onto their prices, compared with 134% in the US and 87% in Europe, according to analysis from Mitsubishi Research Institute.
Breaking this mindset has long been a goal of the central bank as it sought to work with the government to foster a virtuous cycle of higher wages, consumption, prices and growth.
The BOJ’s stimulus measures include a negative short-term interest rate and a cap on 10-year government bond yields. Any change to its policy settings would likely jolt markets, as indicated by the impact of a small tweak to its program in December.
Kishida’s government has recently stepped up its incentives for firms to raise pay, including tax breaks of up to 40% of the cost of higher wages for smaller companies boosting training and raising pay by 2.5% or more.
The initiatives, however, don’t include some of the fundamental, if politically unpopular reforms that some economists say are needed, such as making the labor market more fluid and letting wages reflect economic conditions more directly.
Some companies say Kishida’s incentives are too time-consuming for companies to utilize.
“We just don’t have time to get all the information or apply for these programs,” said Masato Okajima, chief executive officer of Monster Dive Inc., a web production startup based in Tokyo’s upscale Minato ward.
Okajima’s priority is holding on to staff in a highly competitive tech industry. He decided to raise base pay by 15,000 yen for all 34 workers to help them cope with inflation.
Other sectors have been more reliant on government help.
Finn Corp., a Tokyo-based travel agency that specializes in package tours to Nordic countries, has benefited from subsidies to restructure its business model during the pandemic.
With Japan’s borders open again and travel demand on the mend, Chief Executive Officer Shino Mikamo is planning to raise wages. But she won’t be able to do much as higher fuel costs and a weaker yen hurt her customers and business.
“We’re still a long way off a full recovery,” she said.
Fujino, like Mikamo, sees the need to raise wages, but isn’t sure about the long term. Smaller manufacturers down the supply chain struggle to keep raising wages, he said.
“I’d like to aim at giving more raises again next year,” Fujino said. “But who knows what will have happened by then.”
–With assistance from Julie Masuda and Paul Jackson.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.