Overhaul Shunto Wage Talks to Overcome Japan’s ‘lost 30 Years’

The Yomiuri Shimbun
This year’s shunto effectively started on Jan. 24 at the Keidanren Labor-Management Forum in Tokyo.

The shunto spring wage negotiations are unique to Japan and differ from Western labor practices. Although it was an effective framework during the postwar era of rapid growth, it has not functioned well since the 1990s. After 30 years of “low income, low prices, low interest rates and low growth,” also known as the “lost 30 years,” the Japanese economy is now at a critical juncture to see if it can completely overcome deflation. For the Japanese economy to regain vitality, rebuilding the spring labor-management negotiations is essential.

“It’s daunting to walk a dark road alone. But if we all go forward hand in hand, we can feel secure.”

These words were a famous metaphor for the shunto negotiations.

The shunto annual wage negotiations began in 1955. In Europe and the United States, industry-wide unions historically had strong bargaining power. But in Japan, in-house unions have played a central role in negotiating with management and raising wages. Since no single union has much bargaining power, they enhance their power by holding simultaneous negotiations every spring.

American management scholar James Abegglen cites “lifetime employment,” the “seniority system” and “in-house unions,” which are characteristics of Japanese-style management, as factors that contributed to the success of large Japanese companies during the period of rapid economic growth from 1955 to 1973.

Lifetime employment makes it easier for management to develop human resources. Seniority systems have the effect of increasing employee loyalty. In-house unions promote labor-management cooperation.

In the shunto negotiations each spring, labor unions demanded higher wages from management through a bargaining method known as “pattern setting,” based on this Japanese-style management.

Under this method, workers in Japan’s leading manufacturing industries, such as the automobile industry, obtained high wage increases in the shunto negotiations, setting a pattern that spread to other sectors and to small and medium-sized enterprises, raising base salaries across Japanese companies. Japanese companies tended to behave in the same orderly manner. High wage increases continued as long as economic growth and business performance also remained high.

However, with the end of the period of high economic growth and the collapse of the bubble economy, this system began to lose its effectiveness in the 1990s.

A significant turning point was the shunto negotiations in 2002. Despite achieving record profits, Toyota Motor Corporation, a major player in the shunto negotiations, decided on zero pay scale increases for its employees.

Toyota was a leading and symbolic pattern-setter. Other companies were deeply shocked because they referred to Toyota’s pay scale increases as a “prototype meter” in their own wage negotiations.

Toyota’s consolidated ordinary income for fiscal 2001 (ending March 31, 2002) surpassed ¥1 trillion, a first for a Japanese company. In response to this strong performance, Toyota’s labor union demanded a pay scale increase — or rise in the level of base pay — of ¥1,000 per month in the 2002 shunto, up from the ¥600 agreed on in the previous year. However, Toyota management responded that there would be zero pay scale increases.

Coming from a company with record profits, Toyota’s zero pay scale increases became a new model for shunto negotiations under deflation.

I do not intend to criticize Toyota alone. Toyota’s management decision was representative of Japanese industry. In addition, there were unavoidable aspects of the situation as global competition intensified and cost-cutting became a top priority.

At the time, Japanese industry management was discussing the threat of China. Japanese managers shared the view that the biggest challenge was to reform Japan’s high-cost structure and refrain from wage increases to compete with China, which was said to have a wage level one-thirtieth that of Japan.

Hiroshi Okuda, then chairman of Toyota Motor Corporation, who also served as chairman of the Japan Business Federation (Keidanren), repeatedly insisted that “raising basic salaries is out of the question” to maintain international competitiveness. As a representative of the management side, he expressed his strong will to correct Japan’s high-cost structure.

The Chinese threat was more than just a problem for management. Labor unions also feared the loss of jobs due to the relocation of factories to China and other foreign countries.

As a result, the shunto negotiations, which had achieved a certain level of wage increases, turned around and began functioning as a mechanism to suppress wages. Labor-management cooperation spurred this mechanism.

To contain wage costs, Japanese companies increased the number of non-regular employees while protecting the jobs and salaries of existing regular employees. Small and medium-sized enterprises also found it necessary to cut costs severely, leading to the suppression of wage, sluggish consumption and prolonged deflation.

In 2014, the administration of then Prime Minister Shinzo Abe began to wave the flag for wage increases as “kansei shunto,” or government-led shunto. I remember labor unions’ responses to this government policy as being more puzzled than welcoming.

Many manufacturing labor unions, which consisted mainly of regular employees of large companies, were concerned that if they strongly demanded higher wages, management would move factories overseas to China and other countries with lower wage costs. The labor unions continued to demand only small wage increases, placing the highest priority on keeping jobs secure.

The government waved the flag for wage increases for 10 years, but wage increases did not gain sufficient momentum, and the Japanese economy has yet to fully emerge from deflation.

However, when most companies limit their employees’ wage increases and focus solely on cutting costs, the companies and the economy as a whole lose the dynamism necessary to create new services and value that would raise prices.

Today, the threat of low wages in China is less pronounced than it used to be. Wage levels in China have risen to about 60% of those in Japan, and low costs are no longer a major strength of the Chinese economy.

Now is the time to rebuild the shunto negotiations and consider a framework for labor-management negotiations appropriate for the new era.

Labor unions in Japan’s large companies are not as aggressive as their U.S. and European counterparts when it comes to going on strike, but they are more likely to take a cooperative approach. Changing the agreed labor-management line that has taken root in Japan anytime soon will be difficult.

Hisashi Yamada, Economist, Visiting Scholar at the Japan Research Institute, advocates the establishment of three organizations to study new ways of distributing wage increases beyond the boundaries of companies.

■A council of government, labor unions and management

■Councils based on industry and region

■A third-party committee to provide guidelines for wage increases.

Yamada argues that these three organizations should have accountable discussions based on data about wage increases to achieve them.

In the report of its Special Committee on Management and Labor Policy this year, Keidanren repeatedly stated that labor-management cooperation is a strength of Japanese companies.

In parallel with this year’s wage increase negotiations, the government, labor and business communities should reconsider the nature of the shunto talks for the new era. This year’s shunto negotiations should mark a turning point.

Political Pulse appears every Saturday.

Akihiro Okada

Akihiro Okada is an editorial writer for The Yomiuri Shimbun.