Japan's spring wage talks focus on narrowing pay gapsーNHK WORLD-JAPAN NEWS

Key Concepts

• Spring Wage Negotiations (Shunto): Annual wage negotiations in Japan, crucial for determining salary increases.
• Cost Pass-On (Kakaku Dentō): The ability of companies to raise prices to reflect increased costs, vital for wage growth in smaller firms.
• Deflationary Mindset: A deeply ingrained business culture in Japan prioritizing cost reduction and price suppression, stemming from the post-bubble economy and global competition.
• Pyramid Supply Chain: The hierarchical structure of Japanese businesses, with large corporations at the top and numerous smaller suppliers beneath, creating power imbalances.
• Productivity Enhancement: Improving efficiency and output through automation and digitalization, particularly important for smaller firms.

Japan’s Spring Wage Negotiations: Bridging the Gap Between Large and Small Firms

The annual spring wage negotiations, or Shunto, have commenced in Japan, with workers aiming for salary increases that outpace inflation. However, a significant concern is the widening disparity in wage hikes between large corporations and small to medium-sized enterprises (SMEs). Approximately 70% of Japan’s workforce is employed by SMEs, many of which are facing difficulties in raising wages.

Challenges Faced by Small and Medium-Sized Enterprises

A restaurant chain operator with approximately 80 locations exemplifies the challenges faced by SMEs. While the company has implemented cost-cutting measures and modest price increases, the owner acknowledges the limitations of these efforts. He states, “I’m not against wage hikes, but there are limits to what our own efforts can do. So, honestly, raising wages across the board for all workers is pretty difficult.” This highlights the financial constraints impacting SMEs’ ability to increase compensation.

Agreement on Cost Pass-On as a Key Solution

A recent meeting between major labor union and business lobby representatives reached a consensus: passing on increased costs to consumers is crucial for enabling SMEs to raise wages. A representative stated, “For small and medium-sized companies to hike pay, it's very important for them to pass on their costs. We would like to strengthen our efforts on that.” This agreement acknowledges the necessity of a broader economic shift to support wage growth.

The Role of Large Corporations in Leading Wage Increases

The importance of large corporations taking the lead in fostering a wage-increase environment was also emphasized. It was stated that major companies must accept cost increases from their suppliers, allowing them to raise prices accordingly. This acceptance is seen as a prerequisite for a widespread increase in wages throughout the economy.

Comparative Data on Price Increase Capabilities

Labor market expert Yamada Sashi presented data comparing the ability of companies in Japan, the US, and Germany to raise product prices. The data reveals a significant disparity: less than 50% of Japanese firms have successfully raised prices, compared to approximately 90% in Germany. This difference is attributed to the unique structure of the Japanese business environment.

The Japanese Pyramid Supply Chain and its Impact

Yamada Sashi explains that Japan’s business structure often resembles a pyramid, with a dominant brand at the apex and multiple layers of suppliers below. This structure creates significant pressure on smaller companies to reduce costs. These SMEs often rely on a single large client, leaving them with limited bargaining power when facing resistance to price increases. If a major client resists price hikes, smaller companies have few alternatives.

Lingering Deflationary Mindset

Yamada further points to a persistent “deflationary mindset” among Japanese companies, rooted in the economic stagnation following the bursting of the economic bubble in the 1990s and the subsequent competition from low-cost goods, particularly from China. Despite the diminished impact of these factors, this mindset continues to influence business decisions, hindering cost pass-on efforts.

Government Intervention and its Limitations

The government has taken steps to address the issue, revising a law on January 1st to prohibit buyers from unilaterally setting prices without consulting suppliers. While considered a positive step, Yamada believes it is insufficient to overcome the deeply ingrained deflationary mindset and the existing pyramid supply chain structure. He predicts that cost pass-on will occur gradually, and it will take time for Japanese companies to reach the levels seen in the US and Europe.

The Need for SME Productivity Enhancement

Yamada emphasizes that while securing price acceptance from larger companies is essential, SMEs must also proactively improve their own performance. He states, “Small and mid-size firms have lower profitability and sales per worker compared to big companies. So, they need to make further efforts to automate and digitalize their workflows. That way, they can boost efficiency and productivity.” However, he acknowledges that SMEs will require government support to effectively implement these improvements.

Conclusion

The success of Japan’s spring wage negotiations hinges on overcoming the challenges faced by SMEs. This requires a multi-faceted approach: large corporations must accept cost increases from their suppliers, SMEs must enhance their productivity through automation and digitalization, and the government must provide adequate support. Addressing the deeply rooted deflationary mindset and restructuring the pyramid supply chain are crucial long-term goals for fostering sustainable wage growth in Japan.