Many of Japan's biggest companies from tech conglomerates to Toyota (7203.T) have met union demands for substantial wage hikes for a third consecutive year, seeking to help workers cope with inflation and retain staff amid labour shortages.
As annual "shunto" or "spring labour offensive" negotiations at top firms concluded on Wednesday, electronics conglomerate Hitachi (6501.T) said it had agreed to a record 6.2% increase in monthly wages in line with union demands.
Major Toyota auto parts supplier Denso (6902.T) also plans record pay hikes while Toyota said the combined increase in pay for manufacturing staff would match that of last year, which was the highest since 1999.
Policymakers have pushed for robust pay hikes given sharply higher prices for food and record corporate profits on the back of a weak yen. But it's unclear whether the hikes will be strong enough to spur consumer spending and encourage the Bank of Japan to increase its policy rate, still at a low 0.5%, more aggressively.
Economists expect Japan Inc's average pay hike for 2025 to be similar to last year's 5.1% rise, which marked the sharpest increase in 33 years and enabled the central bank to exit its decade-long super-loose monetary policy.
Rengo, Japan's largest labour union umbrella group with 7 million members, will release a preliminary report on agreed terms on March 14. Its unions were seeking an average hike of 6.09%, up from 5.85% last year.
Naoki Hattori, a senior economist at Mizuho Research and Technologies, said that an average pay hike of 5% to 5.5% would support expectations that the Bank of Japan will continue with its practice of raising rates once every six months or so, with the next one seen in June.
"But if we get an average pay hike that is closer to 6% then that changes the complexion of things a bit," he said. "An increase in wages could lift prices, particularly in services. I don't know that we'd see a rate hike as soon as March but we could see one in May," he added.
For the central bank to increase its pace of interest rate hikes, economists say it will need to see wage growth spur consumer spending.
Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, is not optimistic that will happen, saying that an average pay raise of 5-5.5% across corporate Japan this year would "just offset inflation and not drive consumer spending."
In January, the consumer inflation rate used to calculate real wages, which includes fresh food items but not rent costs, rose to 4.7% year-on-year - the highest reading in two years.
How the average pay hike turns out will also depend on whether there will also be strong pay gains at small and medium-sized firms, which employ around 70% of Japan's workforce.
Toyota has said it plans to pay more for domestic components to help suppliers fund pay rises.
"I've heard from smaller firms that they need more support to help them pass on the higher cost of wages to their customers and to increase productivity. The government will work on policy measures to help," Prime Minister Shigeru Ishiba told a meeting with union and business lobby leaders on Wednesday.
Among major companies, Mitsubishi Heavy Industries (7011.T) and electronics conglomerate NEC (6701.T) also responded to union demands in full. Nippon Steel (5401.T) and Panasonic (6752.T) hiked pay but not to levels sought by unions.
Japan's economy long struggled with deflation and before 2023, annual pay increases for two decades were between 1-2%. That left its wage levels well behind the average for the OECD grouping of rich countries.
"This is an important year to ensure that momentum behind wage hikes is established so that Japan's economy can fully escape from deflation," Susumu Takimoto, Hitachi's deputy chief human resources officer, told a press conference.
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