Smaller local Japanese businesses are being pushed to follow their bigger counterparts in raising pay due to rising inflation and a worsening manpower shortage.
This could result in broader wage increases and persuade the central bank to gradually reduce its enormous stimulus programme.
Since the asset floating bag burst in the 1990s, wages in Japan have hardly increased, but they have recently started to rise as a result of pressure on businesses to raise wages to keep up with the rising cost of living.
Importantly, smaller businesses are also beginning to increase compensation even though many of them are experiencing a margin squeeze.
Before beginning the process of removing monetary stimulus, policymakers who are working to generate sustainable demand-sought inflation in the third-largest economy across the globe must take a number of factors into account.
To promote a positive cycle of salaries, prices, and economic well-being, policymakers would like to see more businesses like Huis Ten Bosch Co.
In a rare step to foreshadow compensation increases for the following year, the operator of a theme park in southern Japan disclosed a plan last month to increase pay by 6% in the fiscal year 2024.
According to a poll conducted by the Japan Chamber of Commerce & Industry in March, around 60% of Japan’s small and medium-sized businesses (SMEs) intend to increase pay this year, with approximately 20% aiming for increases of 4% or more.
Even those who were unable to increase basic pay tried to make up for it by giving their workers greater bonuses.
Suzette Holdings Co., a premium candy manufacturer with more than 100 locations across the country and a location in the western city of Ashiya, has offered bonuses this year that are 1.3 times higher than the average of the past two years as sales increased before COVID.
In the annual wage negotiations with unions that closed in March, big businesses proposed pay increases of 3.8%, the largest hike in three decades.
Now the question is whether small businesses, which in Japan account for seven out of ten jobs, would follow suit.
Officials from the Bank of Japan (BOJ) have stated that the outcome of small businesses’ salary negotiations, which will ramp up in June, will be crucial in determining whether Japan will experience long-lasting pay increases that will allow it to gradually reduce its huge monetary stimulus.
BOJ’s summary of a conference of its regional branch managers in the initial days of last month, showed many areas reported that pay increases were becoming more widespread, even among small and mid-sized businesses, as a result of worsening labour shortages and rising inflation.
However, it’s unclear whether SMEs will be able to keep raising pay.
The BOJ’s tankan business mood survey revealed last month that while major firms’ earnings increased 11.5%, small firms’ present profits dipped 2.7% in the most recent fiscal year to March.
The salary increases may only be ephemeral, according to Hisashi Yamada, the professor of labour affairs at Hosei University, thus the central bank may wait to make any significant policy changes until next year and beyond.
According to figures from the International Monetary Fund (IMF), the unemployment rate stayed low in 2023, averaging 2.3%, a level not seen in three decades.
Government data revealed SMEs have per-capita workforce productivity estimated at 5 million yen (about $37,408.35), which is significantly lower than the 12 million yen for big enterprises.
Due to the shrinking labour pools and rapidly ageing population, many Japanese businesses must raise wages to retain talent.
However, some may not be able to do so due to growing raw material costs that are harming their margin.
The ability of SMEs to pass costs along to larger companies at the top of the supply chain and predictions for medium- to long-term inflation are key drivers of pay increases, as said by Yamada.
Government data showed that as of late September, less than half of small businesses claimed to be able to pass on growing costs to customers.