Japan Inc tightens wage purse strings as coronavirus clouds gather

By Tetsushi Kajimoto

TOKYO (Reuters) – Against the backdrop of the coronavirus epidemic and a looming global economic slowdown, big Japanese carmakers and electronics firms are tightening their belts in influential annual wage deals being hammered out with unions.

Setting the tone, Toyota Motor Corp (T:) said on Wednesday it had agreed to give workers an average monthly pay raise that’s 20% lower than last year’s hike. What’s more, the hike reflects factors like seniority – for the first time in seven years, base pay will not rise.

The prospect of tame wage rises to shelter corporate profits will curb consumer spending and make Prime Minister Shinzo Abe’s lofty goal of generating a self-sustaining growth cycle – a key plank of his ‘Abenomics’ policies to stimulate the world’s 3rd biggest economy – even more remote.

Over the past six years, major firms raised wages more than 2% each spring as Abe heaped the pressure on businesses to boost pay to put an end to deflation and stagnation that has dogged Japan for two decades.

BOJ Governor Haruhiko Kuroda has said he would closely watch the outcome of the wage talks for a clue to gauge the price trend, as the central bank may expand monetary stimulus next week to counter the fallout from the spread of the coronavirus.

“Substantial wage increases cannot be expected in 2020 as base pay won’t rise much,” said Yoshiyuki Suimon, senor economist at Nomura Securities. He was referring to base pay hikes, which determine regular pay that accounts for most of monthly salary.

Economists expect to see more wage deals like Toyota’s, with no base pay hike but an average increase of 8,600 yen ($82.15) per month more in the fiscal year starting April, compared with last year’s average 10,700 yen raise.

Koya Miyamae, a senior economist at SMBC Nikko Securities said: “Companies are turning cautious about base pay hikes as the new virus outbreak will exacerbate declines in profits.”

“As the virus outbreak deepens, labor unions are also losing momentum towards base pay hikes, and both manufacturers and non-manufacturers become half-hearted about wage hikes.”

With the economy already teetering on the brink of a recession, however, Japanese firms have become wary about wage hikes committing them to higher fixed costs.

Companies have begun to take a varied approach, with more withholding blanket pay hikes and shifting to merit-based pay rather than seniority-oriented pay in an effort to attract young and skilled workers, while restraining wages for the middle-aged and elderly.

Wage strategies have also been affecting by diversification in Japan’s work structure.

About 40% of workers are now lower-paid part-time staff and contract workers – double the proportion seen in 1990, just before the Japan’s asset bubble burst, ushering in deflation.

The growing army of low-paid workers has led unions to prioritize addressing the income gap between permanent employees and others, rather than broad uniform pay raises.

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