The annual labor-management wage talks effectively got underway with the top-level meeting this week between Keidanren (Japan Business Federation) and the Japanese Trade Union Confederation (Rengo), with both sides concurring on the importance of wage hikes. The momentum for higher wage hikes appears to be building with Prime Minister Shinzo Abe specifically requesting a raise of 3 percent. Despite a continuing expansion of the nation’s economy, growth in consumer spending remains weak and uneven as wage increases stagnate. Businesses posting record profits should consider higher pay raises for their employees as their performance and financial resources allow.

It is a different story, however, whether this decades-old formula of wage negotiations — in which the top business lobby and the largest labor umbrella organization set the direction and talks at leading firms in each industry — remains relevant in the nation’s rapidly changing and increasingly diverse business landscape. Questions should be asked about whether the annual event of wage talks — which is marked by the deep-rooted herd mentality among Japan’s big businesses — continues to be the right formula to increase the wage levels of workers, beef up the international competitiveness of Japanese companies or is appropriate at a time when the government is advocating diverse ways of work in its work-style reforms.

In its guideline for member firms in the upcoming talks with their unions, Keidanren referred to the call from the Abe administration for a 3 percent wage hike as a “request from society.” It is quite rare for Keidanren to mention a specific figure in the wage negotiations that take place between the management of individual companies and their unions each spring. A wage increase of 3 percent or more has not taken place since 1994 — before Japan’s economy suffered the weight of persistent deflation.

For the fifth year in a row the Abe administration is putting its requests in, setting the pace for the labor-management wage talks. The repeated requests from Abe’s government on businesses for higher wage hikes reflects the frustration on the part of the administration that large companies, despite their surging profits, are not doing enough to raise workers’ pay or to make domestic investments. Aided by the weak yen and robust demand in overseas markets, companies listed on the first section of the Tokyo Stock Exchange combined expect to post a record net profit in the business year to the end of March, setting record high profits for two years in a row. Their annual pay raises for workers, which hit 2.2 percent in 2015, have since been dropping and dipped below 2 percent last year, according to a Rengo tally.

A recent Cabinet Office report assessing the state of the economy said wage increases are crucial for the nation to end deflation and urged the business sector to offer higher raises in employees’ base pay than in past years. As the report pointed out, wage hikes continue to be slow despite the tightest labor market in decades and a growing sense of a manpower shortage, and the managements of businesses remain wary of significant raises that increase manpower expenses over the medium to long term.

Labor-management negotiations at major companies in each sector will get into full swing in the coming months as they exchange wage hike demands and offers, aiming to wrap up the talks by mid-June. As always, the results in a handful of leading companies in each sector are expected to set the industrywide trend. The outcome of the talks at big companies will also set the trend among small and medium-size enterprises, although last year the average rate of increase in the workers’ pay scale at SMEs exceeded that of larger firms, reflecting the tight manpower shortage facing the smaller companies.

Each company makes its own management decisions on employees’ wages based on its resources and manpower needs. Many of the major companies should be able to afford to offer higher raises for their employees given their rising profitability and abundant funds. Steady increases in workers’ wages are the key to reviving consumer spending, which will be an integral component of sustained, domestic demand-driven growth of the economy. But it’s time for Japanese businesses to ask whether the collective form of annual wage negotiations serve their interests as they face increasingly tough global competition.

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