Japan Proposes Record Minimum Wage Hike as Inflation Hits

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Japan is set to raise its minimum wage by the most on record, a boost for low-income households as they try to cope with the increasing costs of living.

An advisory panel at the labor ministry decided late Monday to seek a rise in the national average of minimum hourly pay by 31 yen, or 3.3%, from the current 930 yen ($7.07) this fiscal year, according to the ministry. If finalized, that will be a record hike both in terms of the amount and percentage difference since the government began using hourly pay as the benchmark in 2002.

Prime Minister Fumio Kishida sees wage gains as a key factor to drive growth while he also seeks a fairer distribution of wealth. Except for fiscal 2020 at the height of the pandemic, the minimum wage has risen at least 2% since fiscal 2013 as late Prime Minister Shinzo Abe pressed ahead with his economic revitalization program.

“Raising the minimum wage is important in terms of investing in people,” Deputy Chief Cabinet Secretary Seiji Kihara told reporters Monday, before the panel’s decision was made. “I hope it’ll be increased at a pace that’s appropriate for the era of new capitalism.”

A steady wage increase of 3% is seen as necessary to keep inflation above the Bank of Japan’s 2% target in a sustainable manner. BOJ Governor Haruhiko Kuroda has repeatedly cited stagnant paychecks as a missing element that keeps inflation from becoming sustainable beyond a temporary boom in commodity prices.

“This is going to prompt companies to pass cost pressure to consumers rather than saving on wages and cutting production costs,” Economist Takeshi Minami at Norinchukin Research Institute said of the minimum wage hike. “I think this is a good thing to do in a nation like Japan where demand-based inflation remains weak. The government is sending a message to companies.”

So far Japan’s core inflation has remained above the BOJ’s 2% target, although the central bank’s outlook is that by next fiscal year prices will drop down below that level.

In addition to the minimum wage, other measures show workers are getting a modest boost in their paychecks, but overall, the wage hike pace remains below 3%.

Japan’s Paychecks Trail Inflation, Suggesting Cap on Spending

About 4,900 unions in Japan secured a 2.07% increase in average monthly pay in this year’s wage negotiations, according to Rengo, the largest umbrella organization of labor unions. That compares with a 2.2% gain in 2015, the most achieved during Abe’s tenure.

But most workers are not represented by unions in Japan as the unionization rate stood at 16.9% in 2021, according to the labor ministry.

For all workers, overall cash earnings added just 1% in May from a year ago while real wages, adjusted for inflation, fell 1.8%. That means inflation is eroding people’s spending power, which may hurt consumption.

Increases in the minimum wage help households, but it also means higher costs for firms, said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. Unless companies improve their productivity it could lead to cutbacks in part-time workers’ hours, and doesn’t necessarily lead to positive economic growth, he said.

(Updates with more economist comments)

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Author: Yoshiaki Nohara