Japan to target 1% real wage gains within the next five years

Japan Times

15-05-2025

The government is likely to establish 1% growth in real wages as its first-ever official target for pay increases — a move that comes as prolonged inflation continues to exert a drag on domestic demand.
The government will set a goal of reaching 1% annual gains in real wages by the fiscal year starting in April 2029, according to a policy draft by Prime Minister Shigeru Ishiba's new capitalism panel released Wednesday. The goal is based on the premise that stable and sustainable 2% inflation is in place.
"Wage increases are at the very heart of our growth strategy,' Ishiba said after the panel meeting. "We will mobilize all available policy resources to support management transformation and create an environment conducive to wage increases, particularly for small and medium-size businesses, which account for 70% of employment in our country.'
While the government has long urged the private sector to lift compensation, this would be its first official numerical target for broader wage gains. The time frame would largely fit in with another government goal to increase the minimum wage to ¥1,500 ($10) in five years.
The move comes as Japanese households continue to contend with stagnant real income growth even after large firms offered the biggest bumps to nominal pay in decades in recent years. Consumer inflation has stayed at or above the Bank of Japan's 2% target for about three years, while real wages posted gains in just four months over that time span, a major source of frustration for households with a national election looming in the summer.
"The government has the Upper House election in mind,' said Takahide Kiuchi, executive economist at the Nomura Research Institute and a former board member of the Bank of Japan. "While nominal wages have risen significantly, real wages haven't grown — and that's drawn criticism. I think Ishiba wants to send a message now that he is committed to improving consumers' living conditions by setting this goal specifically for real wage growth.'
Many employees at small to medium-size enterprises have tended to see smaller wage increases, while public sector pay has barely kept up with inflation. Monthly pay for government workers rose 2.76% last year, with some improvement in bonuses.
Household spending has failed to gain momentum as shoppers reacted to rising costs of living by tightening budgets and paring discretionary outlays. A gauge of consumer confidence fell in April to the lowest in almost two years.
The 1% real wage growth target is broadly in line with the BOJ's view that nominal wages need to rise by about 3% to generate the demand needed to sustain price growth of 2%. While it's unclear how the government might create incentives for companies to match its target, the move reinforces the government's support of the BOJ's pursuit of a virtuous cycle of demand-led inflation.
Even as the global trade war has created economic uncertainty, the BOJ has reiterated its intention to further unwind its easy monetary settings if the economy performs in line with its forecasts.
While inflation currently exceeds 3%, officials argue that Japan remains some distance from achieving stable, sustained 2% inflation. The BOJ pushed back its forecast for reaching that goal at its policy meeting earlier this month.
Wage growth exceeding inflation has long been a central pillar of Ishiba's policy platform and is likely to become a focal issue ahead of an Upper House election set to take place this summer. A recent public opinion poll taken by Nikkei showed Ishiba's approval rating dipping to 33%, marking the lowest level since he took office in October, with a majority of respondents citing relief from rising prices as their policy priority.
Amid mounting pressure to shore up his support, Ishiba's minority government has agreed to compile a spending package before the vote, with implementation and a supplementary budget planned later in the year. Pressure for bold spending measures is mounting, with the Liberal Democratic Party's junior coalition partner Komeito pushing for the inclusion of cash handouts and tax rebates in the package.