Pressure Mounting for Wage Increases in Shunto Negotiations; Fears about the Response of Struggling SMEs

By Shinsuke Ishiguro and Shuntaro Murase / Yomiuri Shimbun Staff Writers

2:00 JST, February 8, 2024

With Japan’s real wages plummeting for the second year in a row, pressure is mounting for wage increases in the 2024 shunto spring wage negotiations.

The inflation-adjusted real wages dropped 2.5% in 2023, the Health, Labor and Welfare Ministry announced in a monthly salary survey on Tuesday.

The government, unions and company executives have agreed to raise wages above last year’s levels. The focus will be on whether this will trickle down to small and medium-sized enterprises (SMEs), which employ about 70% of the workforce.

Hisato Kozawa, chief financial officer of Mitsubishi Heavy Industries Ltd. emphasized the significance of wage increases at a press conference held Tuesday.

“It is desirable [to raise wages above the cost of living]. We believe that we should return the profits to our employees, as our business performance has improved and productivity has increased in some areas,” he said.

The average wage increase for companies with 1,000 or more employees in the 2023 shunto wage negotiations was 3.6%, an increase of 1.4 percentage points from the previous year, according to the ministry.

Total cash payrolls have also increased for 24 consecutive months.

Some major companies such as Suntory Holdings Ltd. and Mitsui Fudosan Co. have already indicated their intention to raise wages substantially.

“We aim to raise wages in the shunto and to increase disposable income through a fixed-amount tax reduction. The ideal scenario is for real wages to turn positive as prices calm down,” said an executive of Keidanren (Japan Business Federation).

Some economists predict a positive turnaround during 2024.

“The growing likelihood of wage hikes is good news for the economy,” Dai-Ichi Life Research Institute Inc. economist Yoshiki Shinke said.

The Bank of Japan is also keeping a close eye on wage hikes. “We want to confirm whether the virtuous cycle between wages and prices will strengthen, including by looking at trends in the spring labor negotiations,” Gov. Kazuo Ueda said at a press conference on Jan. 23.

Cost reductions

The question is whether wage increases will spread to SMEs. They employ about 70% of the nation’s workforce, and if they do not raise wages, real wages — excluding the effect of rising prices — will not increase, which could affect consumer spending.

However, the business environment surrounding SMEs is tough.

In a survey conducted by the Japan Chamber of Commerce and Industry (JCCI) in January, more than 20% of SMEs said their business performance in 2024 will be worse than the previous year.

There are also concerns about increased logistics costs due to the so-called 2024 problem, in which the logistics industry is feared to be plagued by labor shortages and subsequent reduced transportation capacity because of stricter regulations on overtime work by truck drivers.

When asked by Tokyo Shoko Research Ltd. about wage increase plans in 2024, 11.3% of SMEs said their increases will exceed the level in 2023, while 17.9% said they are unlikely to be able to raise wages. “You can’t give what you don’t have,” JCCI Chairman Ken Kobayashi said.

Yuki Takeuchi, who runs a hotel in Shizuoka City, said he has been asked by his employees to increase wages “equivalent to the rise in prices.” He said he plans to satisfy the demand by securing financial sources mainly by cutting costs. “If we don’t satisfy the demand, workers will turn their backs on us,” Takeuchi said.

Differences among industries

According to the JCCI, more than 60% of companies that raised wages last year did so despite having no improvement in their business performance. Improved corporate performance is essential for continued wage increases.

A quick-fix measure to deal with the problem should be SMEs’ passing on higher labor and other costs in their transaction prices. But many SMEs are unable to offer price negotiations for fear of losing work orders. A senior member of a labor union said, “SMEs could be told [by large firms] to reduce [transaction prices] if they are going to pay higher wages to their employees.”

There was a large difference between industries in terms of the practice to have increased labor costs to be reflected in higher transaction prices, according to a survey by the Small and Medium Enterprises Agency.

In the chemical industry, where the practice has been more widely introduced compared to other sectors, about 60% of the increases in raw material, labor and other costs were reflected in transaction prices. But less than 30% of such increases were reflected in transaction prices in the trucking and broadcast content industries.

The government introduced measures in order to ensure that higher costs are smoothly passed on throughout the business world. Among the measures is the publicizing of the names of companies that refuse to negotiate prices. Eventually, the understanding of consumers regarding price hikes will also be important.

“We want this year’s shunto talks to be where it becomes common wisdom that good products and services demand a good price,” Kobayashi said.