Policymakers hope Shunto sets the tone for wage increases in Japan

While this is a promising trend for the Japanese economy, its short-term impact will be muted by recent real income declines

Greater wage growth will support consumer sentiment and discretionary spending in Japan; however, these effects will be relatively muted in the coming months while inflation is high. These dynamics are likely to come into play in H2 2023 as inflation eases. Small businesses, retailers, and distributors will be under pressure to raise wages for their employees. As these firms are already contending with a challenging cost environment, MNCs looking to raise prices will likely face greater pushback.

While the short-term implications of the wage increases will be relatively muted, this trend could lead to broader changes in the future. Higher wages will support spending growth, raise demand, and ensure stable levels of inflation in Japan. The Bank of Japan (BOJ) will also view strong wage growth as a sign that supports a move away from quantitative easing and toward a normalization of monetary policy. 


Japan’s labor unions have secured the largest wage increase in 30 years, with manufacturers agreeing to pay increases of 3.88%. This is the largest increase secured at the Shunto, Japan’s annual negotiation between labor unions and major manufacturers, since 1993 and could lead to ripple effects across the country. The Shunto sets the precedent for salary increases among Japanese firms, and now that a high bar has been set, there will be pressure on other firms and SMEs to do the same. These trends could see real wages increase meaningfully in Japan for the first time in years.

Moreover, policymakers are invested in seeing wages grow quicker as well, offering tax incentives to firms that do so. In fact, PM Fumio Kishida’s vision for “new capitalism” hinges on strong wage growth. He hopes that higher wages will kick-start a virtuous cycle of growth by stimulating household consumption and raising demand for goods and services.

Our View

There is no doubt that the results of this year’s Shunto are promising for the Japanese economy. Major manufacturers have agreed to substantial wage increases, with companies such as Fast Retailing, Nissan, and Suntory Holdings taking it a step further with double-digit wage hikes. However, it is important to emphasize that these are just small steps in the right direction. There are structural challenges that will prevent the results of the Shunto from immediately boosting consumption and demand in the Japanese economy.

Most importantly, the Shunto only covers a section of the Japanese workforce. Less than 40% of employees in the country are members of labor unions involved in the Shunto negotiations. Smaller manufacturers, retailers, and firms in the service industry are under no obligation to also raise wages by 3.9%. Moreover, these firms have been shaken by the impact of the pandemic, sky-high input costs, and a weak yen. While they will be under pressure to increase wages, it is unlikely that they can meet the standards established in the Shunto by large manufacturers with greater financial might.

These wage increases are also coming about in response to inflation, as real wages are declining at the fastest rate in years. As most households are seeing their purchasing power decline, it is unlikely that nominal wage growth will spur greater consumption in the short term. Japanese consumers are likely to remain pessimistic over the coming months and only expected to raise their spending once inflation eases from current levels. These dynamics will hinder the cycle of growth that PM Kishida outlined in his vision for new capitalism. However, if we do see wage growth of this magnitude hold through 2024–2025, PM Kishida’s vision could become a reality, as households would see consistent real income growth that supports increased consumption and healthy levels of inflation.

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