Japan firms agree to biggest pay hike in 34 years, but will it boost consumer spending?

Reuters

14-03-2025

TOKYO, March 14 (Reuters) - Japanese firms agreed to raise wages by more than 5% on average this year, on course for their most substantial pay hike in over three decades - a relief for many workers though it's unclear if the increases will lead to a meaningful jump in consumer spending.
As annual labour negotiations wrapped up this week, many of Japan's biggest companies said they met union demands in full. Some, such as electronics conglomerate Hitachi (6501.T), opens new tab, delivered record pay increases, though a few sectors were left out in the cold.
Hefty pay hikes have been seen as essential to counter inflation-induced sharp increases in the cost of living. Many companies, emboldened by record profits on the back of a weak yen, are also keen to retain staff amid labour shortages.
More broadly, policymakers have long urged Japan Inc to lift pay so ordinary citizens might break out of a mindset conditioned by decades of deflation that has made them reluctant to spend with confidence.
The 5.46% preliminary reading from Rengo, a 7 million member-strong group, represents the third year in a row of substantive increases for base pay and the highest increase in 34 years.
It compares with last year's preliminary reading of 5.28% which was then revised down over several stages to 5.1%. Final tallies are usually lower than preliminary figures as most agreements for smaller companies are factored in later.
While robust, the headline number was probably not enough to encourage the Bank of Japan to hasten its pace of hiking interest rates every six months or so.
Economists also worry that most of the wage growth will go towards offsetting inflation. Headline consumer inflation, including fresh food prices, hit 4.0% in January, a two-year high.
Nana Nagayama, 51, who was visiting Tokyo from the northern island of Hokkaido on a graduation trip for her daughter, said her husband hasn't mentioned any expectations of a big increase and expects money to continue to be tight.
"This trip, for example, my husband didn't come so we could save money," she said.
YOUNGER SPENDING
Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, said younger people who might have large wage hikes were perhaps the most hoped-for driver of consumer spending.
"Hopefully having experienced roughly three years of increases to their base pay, young people will be feeling less insecure about the future," he said.
Rengo's member unions sought an average hike of 6.09% this year, up from 5.85% in 2024 and much of the focus was on achieving robust pay rises for workers at smaller firms, which employ about 70% of Japan's labour force.
They appeared to have had some success with the average pay increase for smaller companies at a preliminary 5.09%, topping 5% for the first time since 1992.
Underlining how wage growth is a top priority, Prime Minister Shigeru Ishiba this week ordered authorities to look at ways to encourage higher pay for truckers. He also said the government would consider more measures to help smaller firms pass on costs to customers, enabling them to pay workers more.
In some sectors, there was no pay hike. The Japan National Hospital Workers' Union did not receive a response from management to its request for a 40,000 yen ($270) hike to monthly base pay, prompting some 200 workers to go on strike in protest on Thursday.
But for those getting hikes, there was a palpable sense of relief.
"With the cost of living rising significantly, the wage increase has really helped me feel more at ease both lifestyle-wise and psychologically," said Sakurako Chiba, an employee at a large education-related company in her mid-30s.
"Overall, it has motivated me to work harder, which I think is great."
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