More Japanese companies are shifting to merit-based pay as competition for workers heats up, but the change risks holding back the sort of blanket wage hikes the prime minister says are needed to inflate the economy.

Ahead of annual labor talks set for March 11, the momentum to agree to broad wage rises is waning as the focus shifts to merit-based pay scales. Bellwether auto giant Toyota Motor Corp.'s labor union is no longer seeking blanket pay rises, likely prompting others to follow suit.

It could give Japanese firms the excuse not to boost overall labor benefits, with many wary of fixed costs as profits are seen being squeezed by Sino-U.S. trade tensions, the new coronavirus outbreak and global slowdown.