Alicia García Herrero (Natixis) | Japan has developed an unusual social consensus to raise wages, to protect people’s livelihood from rising inflation. With this background, the spring wage negotiation among major firms is expected to result in a rise of +3.8%, the largest increase in 30 years.
However, subdued productivity gains at a macro level are expected to limit a sustainable wage increase in Japan. Because large firms have improved their productivity, they have more room to raise wages, which was demonstrated in the spring wage negotiation. On the other hand, SMEs’ productivity has stagnated, reducing their capacity to raise wages. In fact, a recent survey by a credit union in the southern Tokyo revealed that 48% of their customers are not planning to raise wages. Because SMEs generate about 70% of Japan’s employment, overall wage increase is likely to be limited to about 1.8% in 2023.
Japan’s falling potential growth over the past decades is also anticipated to contain wage growth. In fact, the stagnating total factor productivity (TFP) could have been caused by the low digital transformation especially among SMEs. In this regards, Prime Minister Kishida’s initiatives to encourage reskilling with a JPY 1 trillion fiscal package could be a positive movement towards lifting the potential growth in the long-term. For these reasons, the wage increases are unlikely to be sustainable beyond the short-term base year effect in 2023.
The Bank of Japan (BoJ)’s commitment to achieve the 2% inflation target remains very important under the new Governor Ueda. While wage development is unlikely to be strong enough to achieve the 2% inflation target in the medium term, inflation expectations have remained elevated, as companies continue to transfer higher input costs to their customers.
Against such backdrop, although we are not expecting the BoJ’s new Governor, Ueda, to rock the boat at his first meeting from today, he will surely be watching wages as the key variable for him to action in the future. At some point, wage developments might be the lever that Ueda will use to lift the BoJ’s yield curve control (YCC), which is becoming a big problem as it is pushing yields unnecessarily low weakening the Yen and, thereby, households’ purchasing power.