FOCUS: Input cost rise, Omicron await as PM Kishida pins hopes on wage hikes

© Kyodo News

Japanese Prime Minister Fumio Kishida is counting on companies to raise wages to accelerate wealth redistribution, the centerpiece of his push for a new form of capitalism.

Companies will need to factor in a recovery in their earnings from the COVID-19 pandemic but also heftier energy and material costs and the unknown impact of the Omicron coronavirus variant when annual labor-management wage negotiations begin in the spring of 2022.

Wage growth is critical for consumers to step up spending and rejuvenate the world's third-largest economy, analysts say. Higher consumption should make companies feel more comfortable about raising prices and help the Bank of Japan as it struggles to fire up inflation toward its elusive 2 percent target.

"It's important to use all possible means to create a mood in which companies want to raise wages," Kishida said recently at a press conference. The prime minister is calling for a pay hike of over 3 percent by companies, as long as their earnings have recovered to pre-pandemic levels.

Kishida is not the first Japanese leader to set a numerical target for wage hikes. Shinzo Abe, the country's prime minister who stepped down in 2020, urged business circles to raise wages and called for a 3 percent increase for 2018 "shunto" wage talks.

"Listed companies such as exporters that have seen robust earnings are expected to offer higher pay when consumer prices are rising. But pay hikes won't be across the board," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.

Wage growth remains tepid in Japan even after rebounding from a recent low of 1.63 percent among major companies in 2003. Such companies agreed to an average 1.86 percent pay hike in the 2021 negotiations.

Meanwhile, Japan's labor productivity continues to be low, a longtime problem keeping wage increases to a minimum. In 2020, the country ranked 23rd among the 38 members of the Organization for Economic Cooperation and Development in terms of labor productivity, or output per worker hour, according to Japan Productivity Center data.

In a recent speech, BOJ Governor Haruhiko Kuroda said that inflation should come with wage growth and that companies seeing labor productivity improve tend to raise wages.

Absent strong salary growth, households would feel more pain at a time when inflation is picking up due to higher energy and raw material prices as well as a weak yen inflating import costs, economists say. Some food companies have decided to hike product prices to offset cost increases and analysts are watching their impact on broader consumer sentiment.

In November, the core consumer price index, excluding volatile fresh food items, increased 0.5 percent from a year earlier, marking the sharpest gain since February 2020. Based on the BOJ's projections, the core CPI will likely rise 0.9 percent in the current fiscal year from April.

The shunto wage talks between management and labor unions at major Japanese companies are usually settled in March ahead of the start of a new fiscal year in Japan.

In the 2022 negotiations, wage growth is expected to pick up to 1.98 percent, short of Kishida's requested level, said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Japanese firms are often cautious about raising base pay because doing so will increase fixed costs while pay cuts are difficult once salaries are raised in Japan. Management would rather reward employees with higher bonus payments when earnings improve, analysts say.

"Pressure from the political side on the corporate sector to raise wages was stronger during Abe's time than now," said Toru Suehiro, a senior economist at Daiwa Securities Co. "The point is that the pace of recovery from the COVID-19 pandemic still varies and service providers won't be able to agree to pay hikes just because their business environment is expected to improve."

Uncertainty over how transmissible and serious the Omicron strain is and its potential impact on the economy may leave companies in a wait-and-see mode.

"Companies have to be confident about the outlook when they raise base pay. A sense of uncertainty is what keeps them from base pay hikes," Kodama said.