Why wages in Japan are not increasing
A mystery swirls around the world’s third-largest economy: why haven’t wages risen in Japan over the past two decades as they have elsewhere?
Since Prime Minister Fumio Kishida took office, he has made it clear that raising wages is one of the main priorities of his economic program and a crucial part of his “new capitalism”.
But there are no simple solutions.
Economists point to a series of major contributing factors, including decades-long deflation, the country’s employment culture and a growing number of part-time and contract workers.
According to OECD data, the average annual salary in Japan increased until 1997 to $38,395 and then leveled off. Salaries have remained at the same level since. In 2020, the latest data available, the average Japanese worker earned $38,515 (equivalent to approximately 4.45 million yen based on the current exchange rate).
During the same period, however, the average wage in many other countries has increased, sometimes dramatically.
For example, the average salary in South Korea was $21,830 per year in 1990, but exceeded that of Japan in 2015, eventually reaching $41,960 per year in 2020. In another example, salaries in Japan and UK were almost the same in the late 1990s, but in 2020 they were much higher in the UK at $47,147 per year.
What initially held back wage growth in Japan was a recession triggered by the bursting of the asset bubble in the early 1990s. Later in the same decade, the 1997 Asian financial crisis caused further damage. .
There were periods of growth in the years that followed, but wages in Japan barely budged.
“There are several causes behind stagnant wage growth in Japan, but I think it’s related to deflation,” said Hisashi Yamada, vice president of the Japan Research Institute, a Tokyo-based think tank.
Due to persistent deflation, Japanese businesses are just as entrenched in the deflationary mindset as consumers.
Normally, when costs increase, they are reflected in the prices of products and services. This increases a company’s revenue, which ultimately leads to an increase in salaries for its employees.
But Japanese companies have been too reluctant to pass the costs on to price-sensitive consumers since their wages have not increased. Yet without a pay rise, Japanese customers remain frugal. Yamada calls it a “vicious spiral” that began after the 1997 financial crisis.
When Shinzo Abe began his second term as prime minister in 2012, he was eager to fight deflation with aggressive monetary easing from the Bank of Japan. The plan has failed so far.
In addition to deflation, many economists argue that slow wage growth in Japan is linked to a growing number of part-time and contract workers in recent decades.
Companies use these workers to reduce costs. Full-time employees are strongly protected by law, so employers are increasingly hiring part-time and contract employees because they are easier to fire when times are tough.
There is a huge wage gap between employees with full-time contracts and those without, so the increase in part-time and contract workers is dampening the growth of average wages in Japan.
As more women and older people have worked part-time amid severe labor shortages in recent years, Yamada said Japan should invest more in these workers to upgrade their skills, so that they can pursue better careers with higher salaries.
Another important factor is the employment culture in Japan.
Traditionally, lifetime employment and seniority systems were common in many companies, but the mindset of many workers has changed in recent decades, with more and more people – especially young people – changing jobs more often.
But overall, many workers still want job stability and tend to stay with the same company for a long time.
Under such circumstances, “unions and management focus more on protecting jobs rather than raising wages,” said Keiji Kanda, senior economist at the Daiwa Institute of Research.
To ensure job stability, “their businesses must be run sustainably, so that both businesses and workers accept relatively small wage increases,” Kanda said.
Companies are also often reluctant to increase wages because once they are raised they are difficult to lower again for fear that worker motivation will drop significantly.
As for the bargaining power of Japanese unions, Yamada of the Japan Research Institute said they have never been very aggressive when it comes to wage increases.
During the 1970s and 1980s, unions were more demanding, he said. But that was because the Japanese economy was growing at such a fast and steady pace.
Therefore, the annual shunto wage negotiations between unions and management each spring haven’t really worked as a powerful tool for wage increases, according to Yamada.
“I think it’s time to rebuild the shuntō system as an effective method of raising wages,” he said.
Japanese unions need to strengthen industry-wide cooperation like in Europe to gain more bargaining power, rather than a union negotiating with a company, Yamada said.
Union members can also work together to drive industry-wide efforts to develop worker skills and keep up with business trends, such as digitalization.
Stimulating the fluidity of the labor market is another approach to raising wages.
Since many Japanese workers don’t really change jobs and it’s hard for employers to lay off workers, Kanda said the government and companies should encourage workers to have side jobs if possible.
“It will give them trial opportunities (while keeping their main job). If it turns out that the companies they work for as a side job are more suitable, then they can make a change,” Kanda said.
“Since telecommuting has become more common recently, they can also work for companies” outside of their commuting zones, he added.
But now, after years of deflation, the wave of global inflation that is also driving up prices in Japan may finally prompt Japanese companies to raise wages.
Rising commodity prices and energy costs are forcing Japanese companies to raise prices for their products and services. from Japan the wholesale price increased by 8.5% year-over-year in December to reach the second highest gain on record.
Seen from another angle, the current inflationary trend could be an opportunity for Japanese companies to break out of the deflationary mindset. According to Yamada, if price increases continue to spread to more goods and services, it will be essential for companies to raise wages.
Otherwise, he said, “households will not be able to withstand the impact.”
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