Labor shortages and changing price expectations should drive broader wage increases across the market; however, improvement in consumer spending will only be gradual
Stronger wage increases for Japanese workers will improve consumer spending levels and lead to an easing of price sensitivity late in 2024 and into 2025. Gains on this end will accumulate slowly as most households continue to struggle with a contraction in their purchasing power and continued cost-of-living pressure. B2C firms should closely monitor wage developments and regularly align with local teams and partners to gauge the evolution of price sensitivity in the market. Moreover, positive wage growth data in Q2 and Q3 2024 will give the Bank of Japan (BOJ) further confidence that the economy will sustainably be able to maintain healthy inflation levels over the medium term. This would make another interest rate hike more likely, with rates expected to rise to 0.25% in Q4.
A risk of stronger wage pressure in Japan will be an increase in profitability pressures among SMEs. Labor shortages and changing market expectations may drive an unsustainable increase in operating costs for some firms. This will be a difficult dynamic to navigate, especially as a weak yen continues to drive up import costs, and higher interest rates make borrowing more expensive.
Overview
Rengo (the Japanese Trade Union Confederation) won wage increases of 5.3% year-over-year for its members in the 2024 wage negotiation, the highest in 33 years. It also won wage increases of 4.44% for its members working in SMEs. Rengo represents 771 labor unions in Japan and has over 6 million members, covering industries from retail and manufacturing to essential services. However, despite the reach of Japan’s labor unions, they only represent 16% of the workforce. A determining factor for positive real wage growth in 2024 will be the level of wage increases non-unionized workers employed by SMEs—which make up the bulk of Japan’s workforce—are able to secure.
Our View
The strong wage increases secured by Japanese unions are a positive trend for the market. It will help restore household purchasing power, which has taken a hit in the last two years, and it will be crucial to lift Japan out of its deflationary habits. Higher wage growth will give consumers confidence to continue spending when prices increase.
However, the unions’ victory is just part of the story. The majority of Japanese workers are not represented by unions and are employed by SMEs. These firms do not always have the financial capacity to raise wages at the same pace as larger Japanese firms. These businesses are also exposed to the effects of higher prices and the yen’s historic depreciation. The inability of SMEs to match wage increases of 3.8%, which were agreed upon at last year’s Shunto negotiations, is one of the main reasons that real wages fell in 2023 as well.
Yet, there are reasons to believe that 2024 will be different from 2023, and that a larger proportion of workers will win higher wages. First, labor shortages have become more acute across a variety of industries. As shown in the BOJ Tankan survey data, employment conditions are becoming more challenging for businesses because there is insufficient labor supply available. These conditions should drive up wages as firms compete to attract the limited pool of workers in the market. Second, workers have been more vocal in demanding wage hikes, and firms have become more confident in their ability to increase prices. This will allow firms to appease workers with higher wages and pass on some of these costs to end-customers. These signs that Japan is moving out of its deflationary tendencies led to the BOJ raising interest rates for the first time in 17 years, a symbolic victory over deflation in the market that will encourage firms and workers to expect continued increases in prices and wages. Third, some Japanese firms are moving away from their tenure-based compensation structures to performance-based ones. Most notably, Fast Retailing (Uniqlo’s parent company) announced this change in 2023 along with wage increases of up to 40% for some employees. While this is a relatively nascent trend in Japan, higher wage pressures along with rising costs may drive more firms to value productivity and merit over tenure and job security moving forward.
For these reasons, we believe wage growth in 2024 will surpass levels seen in 2023; however, real wages will only turn positive gradually over the course of the year. Purchasing power will take longer to recover, as it currently stands 4% lower than the 2020 levels. As a result, while this year’s Shunto was a positive outcome, it will need to be repeated in 2025 for a complete recovery of consumer purchasing power, which will spur stronger household spending.
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