With soaring import costs prompting companies to mark up prices, and in the process putting financial pressure on households, it’s becoming more and more crucial that Japan creates momentum toward wage growth.

On Tuesday, a government panel kicked off discussions on a hike to the average minimum wage, which is expected to garner a great deal of attention.

Every year, usually early in the summer, the labor ministry’s minimum wage panel comes up with a rough target for hourly wage increases. Based on that figure, panels in each prefecture make a decision on changes to the local minimum wage, with the new rates implemented around October.

"To realize the nationwide average of ¥1,000 per hour as soon as possible, I'd like to request (members of the panel) to thoroughly discuss the matter while taking into account the cost of living, (current) wage levels and (employers') ability to pay wages," labor minister Shigeyuki Goto told the panel.

In light of rising inflation, it’s likely that the panel will propose at least the same level of increase as in fiscal 2021, which ran through March, some experts say. But given that steep hikes in recent years have put a heavy burden on companies, especially small and midsize firms, a sharp pay raise could further hurt struggling companies.

“Since the situation with the pandemic has improved compared with last year and prices are rising, I think the discussion will proceed on the premise that a 3% hike is the baseline and whether it will be possible to add extra to that,” said Hisashi Yamada, a senior economist at the Japan Research Institute.

“But it’s been tough for companies in some industries to add increased costs to price tags, and meanwhile there are quite a lot of firms that have had to take on debt due to the pandemic.”

Last fiscal year, Japan regained momentum toward increased minimum wages, as the panel proposed a record hike of 3.1%, or ¥28, making the nationwide average ¥930 per hour. The country had seen hikes of about 3% for four straight years until fiscal 2020, when it was effectively kept on hold because of the economic fallout from the pandemic.

The panel is expected to present this year’s target later this month.

Although consumers have been impacted by growing inflation, with Japan’s core consumer price index having jumped for the ninth straight month through May year on year, companies are also suffering from skyrocketing import costs stemming from soaring commodity prices and the fast fall in the value of the yen against the U.S. dollar.

According to a February survey conducted by the Japan Chamber of Commerce and Industry (JCCI), a major lobbying body for small and midsize enterprises, companies understand that raising minimum wages is important for workers, but many seem to be worried about the financial consequences.

In the survey, 41.7% of the companies said the minimum wage should be raised this year, up from 28.1% last year. But 65.4% said that the current level of the minimum wage is a “heavy” or “somewhat” of a burden on their businesses.

In the past six years, Japan was focused on increasing minimum pay to drive momentum for wage growth and in the process stimulate consumption, as the administration of former Prime Minister Shinzo Abe had laid out a goal of boosting the country’s nominal gross domestic product to ¥600 trillion by fiscal 2020.

A number of companies have apparently been struggling to keep up with the hikes in recent years.

The JCCI poll showed that 40.3% raised their minimum wage to match last fiscal year’s record hike.

Asked what they would do to offset increased costs if the government panel proposes a raise of ¥30, or 3.2%, this year, 45.9% of the 2,118 firms answered that they would slash other costs, including capital expenditure. They were allowed to choose multiple answers.

“It’s concerning that many companies responded that they might curtail capital expenditure,” because such investments are essential to improving productivity, which will help boost companies’ profits and employees’ wages in a sustainable manner, Yamada said.

While a minimum wage hike is critical due to price increases in recent months, the government needs to carefully work with both the labor and management sides, he said.

Last year, the two sides were unable to bridge their differences, with two members of a subcommittee of the labor ministry panel who were representing companies opposed to the proposed record hike. It was the first time that the subcommittee had failed to come to a unanimous agreement.

“It’s companies that pay wages, so if they are not convinced, some companies may not comply with the law in the worst-case scenario,” Yamada said.

Employers that fail to comply can be fined up to ¥500,000.

While the nationwide average minimum hourly wage is ¥930, the highest is ¥1,041 in Tokyo and the lowest is ¥820 in Kochi and Okinawa prefectures. The government aims to increase the nationwide average to ¥1,000 as soon as possible.

Yamada added that the current process of deciding increases on a prefectural basis does not seem to be working effectively, because companies’ situations vary significantly depending on their industry.

While a discussion on minimum wage hikes should also take place at the industry level, it’s also important that the government provides support for firms struggling to keep up with hikes, he said.

“Since minimum wage hikes have impacted more companies, I think there needs to be a more careful approach,” Yamada said.