Pay rises at Japan’s top firms will be blunted by rise in sales tax

PUBLISHED : Wednesday, 12 March, 2014, 1:59pm
UPDATED : Wednesday, 12 March, 2014, 3:28pm

Big Japanese companies such as Toyota Motor will offer the most generous pay raises in years on Wednesday, but workers will still struggle to offset a sales tax increase next month, highlighting the difficulties the government is facing in overcoming entrenched deflation.

Toyota, Hitachi and Panasonic will be among the firms announcing their responses to union pay demands after a year of soaring profits thanks to the weak yen and massive stimulus policies of Prime Minister Shinzo Abe.

But this first batch of companies in Japan’s annual “spring labour offensive” represent the bluest of the blue chips; the vast majority of Japanese employees work for smaller companies that haven’t benefited as much from “Abenomics”.

“It’s impossible for wage hikes to totally offset the impact of the sales tax hike,” said Hisashi Yamada, chief economist at the Japan Research Institute.

“It’s hard to think wage hikes would spread among small firms as much as big firms.”

Government spending and the Bank of Japan’s enormous asset purchases have made a start in dragging the world’s third-biggest economy out of 15 years of deflation and uncertain growth, but a durable recovery needs a cycle of rising profits, wages and prices.

It’s hard to think wage hikes would spread among small firms as much as big firms
Hisashi Yamada, Japan Research Institute

Abe’s government has been publicly pressuring companies to do their part and raise wages. Economy Minister Akira Amari appeared to threaten government action against firms that don’t comply.

“Companies that don’t make any response, despite having higher profits, despite the government front-loading corporate tax cuts and transferring capital to them, are being unco-operative in contributing to a positive economic cycle,” Amari said on Tuesday.

“The Ministry of Economy, Trade and Industry will take some kind of response.”

For major firms generally, total increases are likely to be about 3 per cent, analysts say, just enough to cover the sales tax increase that takes effect next month but not to offset the modest inflation the BOJ is trying to generate.

For the thousands of companies below the top tier – which employ the vast majority of Japanese workers – compensation is likely to be less generous.

For example, when big carmakers such as Toyota raise base pay for their workers, they can squeeze suppliers to cut costs, putting downward pressure on their wages and diluting the economic lift of the wage gains at the top.

Including smaller firms – where import costs have risen owing to the weak yen and which employ many part-timers and other irregular workers – the pay packets of Japanese employees overall may grow just 1 per cent or so, analysts said.