Creating conditions for an interest rate hike in April? Japanese labor unions' "Shuntō" demand the highest wage increase since 1993

Japanese labor is seeking the largest wage increase since 1993. Does this signal the long-awaited "wage-price" spiral in the Japanese economy?

Japan's largest labor union organization, the Japanese Trade Union Confederation (Rengo), stated on Thursday that its member unions are demanding an average wage increase of 6.09% this year, up from 5.85% last year, marking the first time in over thirty years that they are seeking an increase exceeding 6%. Unions representing small business workers are even demanding a 6.57% increase, higher than last year's 5.97%.

Rengo represents approximately 6.8 million workers across various industries in Japan. This strong wage demand suggests that the upcoming labor negotiations may exceed expectations. Following the announcement, the yen rose to around 147 against the dollar.

Keiji Kanda, a senior economist at the Daiwa Institute of Research, stated:

“Workers are making higher demands because they know companies are considering raising wages to retain employees. Given the accelerated inflation in recent months, workers may also be seeking compensation.”

Government and Central Bank Closely Monitor, Wage Negotiations May Influence Policy Direction

Sustained wage growth is a key component of the demand-driven virtuous economic cycle sought by the Japanese government and the Bank of Japan.

In March of last year, just days after Rengo released preliminary wage agreement results, the Bank of Japan raised interest rates for the first time in 17 years. Initial statistics showed that approximately 770 unions representing major companies achieved an average wage increase of 5.28%, the largest increase in 33 years.

This year, Rengo will announce the first batch of wage agreements on March 14, five days ahead of the Bank of Japan's next policy decision, similar to last year's timeline. Bank of Japan Deputy Governor Shinichi Uchida stated this week that the benchmark interest rate will remain on a gradual upward trajectory.

This large-scale wage negotiation in Japan coincides with the Bank of Japan's efforts to end years of deflation. Most observers expect that after raising rates to 0.5% in January, the Bank will delay further rate hikes until summer. However, wage agreements that exceed expectations could bring forward the timing of rate hikes, with some analysts suggesting that the April/May meetings could be a potential window.

Rengo President Tomoko Yoshino stated at a press conference:

“We hope to achieve results that meet our demands. I sense a strong willingness from small and medium-sized enterprise unions regarding this year's wage negotiations.”

Can Wage Increases Alleviate Public Discontent and Boost Prime Minister's Approval Ratings?

Japanese Prime Minister Shigeru Ishiba's government will also closely monitor the progress of wage negotiations, as the outcomes may influence public sentiment and sway Ishiba's approval ratings ahead of the summer elections Currently, the cost of living crisis continues, with Japan's overall inflation rate reaching 4% in January. The weak yen has driven up import costs, slowing the growth of disposable income.

Despite wage increases reaching a multi-decade high during last year's salary negotiations, real wage growth has been uneven at best. According to the annual statistics from Japan's Ministry of Labor, real wages fell by 0.3% in 2024, marking a decline for three consecutive years.

A survey by Teikoku Databank shows that over 60% of Japanese companies plan to raise workers' wages this year to attract and retain employees. This figure is a record high.

However, some analysts point out that merely increasing nominal wages may not be enough; real wage growth is necessary to truly enhance people's purchasing power.

Moreover, even if wages rise, whether companies can pass on the increased costs to consumers without affecting their profitability remains to be seen. If companies cannot effectively cope with rising costs, it may lead to layoffs or reduced investment, thereby offsetting the positive effects of wage increases.

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