Japan’s smaller firms face wage hike hurdles
- Josephine Tan
- Topics: Compensation and Benefits, Home Page - News, Japan, News

As Japan’s annual shunto spring wage negotiations kick off, concerns are mounting that smaller organisations may struggle to meet ambitious pay raise targets, potentially widening the income gap and leaving employees vulnerable to persistent inflation.
Rengo, Japan’s largest trade union confederation, has set aggressive wage-increase targets, exceeding 6% for smaller enterprises and 5% for larger corporations. However, analysts and business leaders suggest these goals may be difficult for smaller enterprises to achieve.
“I believe that this is indeed a tough goal for small and mid-sized companies,” commented Yutaro Suzuki, an economist at Daiwa Securities. He acknowledged the necessity of such targets to prevent further widening of the wage gap, highlighting Rengo’s commitment to this issue.
The backdrop to these negotiations is a challenging economic environment marked by a weakening yen, stagnant real wages, and persistent inflation. December saw consumer prices (excluding fresh food) rise 3% year-on-year, the highest jump in 16 months, putting pressure on the Bank of Japan. Significant wage increases are seen as a potential solution, offering the central bank greater policy flexibility.
Ken Kobayashi, Chairman of the Japan Chamber of Commerce and Industry, recently indicated that only around 11% of small businesses plan to offer wage hikes above 5%. This contrasts with last year’s shunto results, which saw overall wage increases of 5.1%, a 30-year high. However, the average increase was significantly lower for smaller enterprises with limited union representation, at 3.98%.
With small and mid-sized enterprises (SMEs) employing approximately 70% of Japan’s workforce, their ability to implement substantial pay rises is crucial for achieving real wage growth that outpaces inflation. “Historically, employees at smaller enterprises tend to receive smaller wage increases compared to large companies,” noted Suzuki. He explained that while larger organisations have benefitted from price increases amidst the weak yen, smaller firms have struggled to pass on rising costs to consumers.
Tetsuji Ohashi, who chairs Keidanren’s labour policy committee, acknowledged the “high hurdles” facing smaller businesses in achieving the 6% target, citing cash flow constraints. A recent survey by the Small and Medium Enterprise Agency revealed that SMEs have only been able to pass on approximately 50% of increased costs to customers despite some improvements.
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The government is taking steps to address this issue, with Prime Minister Shigeru Ishiba announcing plans to revise the Subcontractor Act to bolster support for small businesses in passing on increased costs.
While challenges persist for smaller firms, analysts predict larger companies will likely deliver robust wage increases, potentially reaching the “over 5%” target. Takeshi Niinami, Chairman of the Japan Association of Corporate Executives, anticipates average wage increases of around 5% for larger corporations, reported The Japan Times. However, as Niinami emphasised, “What’s really crucial is to realise solid wage increases among small and mid-sized companies.”