Japan CEOs Facing Inflation Are Talking More About Merit-Based Pay

(Bloomberg) — As business leaders in Japan face greater pressure to raise wages in an inflationary environment, they’re becoming more vocal about the need to pay employees based on merit.

“It’s not necessarily good for people to feel like they’re being compensated because of inflation,” Takahito Tokita, chief executive officer of Fujitsu Ltd., said in a recent interview. “It’s better if we do it because the business is healthy. What we want to do is reward each and every employee who contributes to the growth of our company.”

On one hand, such talk can be seen as a sign of corporate Japan casting aside the remains of a compensation system based on across-the-board rewards and seniority. On the other, it also reflects a degree of hesitancy to raise salaries in knee-jerk reaction to inflation. That’s making it unclear whether rising consumer prices will lead to higher wages. 

Even so, Japan is showing signs of emerging from decades of deflation and loose monetary policy. Consumer prices are on the rise, with Tokyo inflation at a 40-year high of 4%. Manufacturers are bracing for tough negotiations with unions during annual spring wage talks. A tight labor market is forcing businesses to raise salaries to attract and retain talent.

Fast Retailing Co., operator of Uniqlo and other fast-fashion brands, announced last week that it will raise annual pay for full-time employees by as much as 40%, joining domestic businesses such as Nippon Life Insurance Co. and Suntory Holdings Ltd. in boosting salaries. The retailer’s wage hike Acovers workers at its headquarters as well as in stores, and includes new hires. 

Beyond the dramatic headline figure, Fast Retailing made it clear that compensation would be based on “factors such as work performance and results, ability to contribute to the business, ambition and growth.”

“The point of the change is to encourage employees to do the quality work that meets global standards,” Takeshi Okazaki, Fast Retailing’s chief financial officer, said in a briefing. “If you want to ask for a world-class level of work, then you should give a world-class reward.”

The pay hikes also reflect the fact that wages in Japan remain the lowest among G7 nations. Average annual compensation in the country was $39,700 in 2021, according to the Organisation for Economic Co-operation and Development. The average among OECD countries was $51,600, while the US had the highest level of $74,700.

Japanese companies are finding themselves caught between a persistent deflationary mindset among consumers — making it harder for them to raise prices for goods and services — and broader inflation and rising energy prices that are fueling demands for them to raise salaries, according to Travis Lundy, Pan-Asia analyst at Quiddity Advisors who publishes on Smartkarma.

“Pay your workers more, and they’ll go buy more products” was former Prime Minister Yoshihide Suga’s public pet peeve, Lundy said. “But that didn’t really happen.”

Triggering the wage-price cycle of rising salaries feeding into higher prices, and vice versa, has arguably been Haruhiko Kuroda’s most elusive goal as Bank of Japan governor and architect of a decade-long experiment in ultra-loose monetary policy. Some of the speculation around a shift in inflation and wage expectations is linked to a planned transition to a new central bank chief in the coming months.

Indeed, real wages in Japan fell 3.8% in November, the most since 2014, according to the latest figures released by Japan’s labor ministry earlier this month. Real cash earnings, which reflects income adjusted for inflation, show that businesses aren’t keeping up with recent inflationary trends.

The Japanese Trade Union Confederation, the collective bargaining group known more colloquially as Rengo, has embraced “casting off a deflationary mindset” as one of its core tenets in upcoming wage negotiations. The group has made it clear that it is expecting wages to be increased by 5%, and at least 3% in terms of base pay. 

As Japan’s economy grew at a torrid pace in the 1960s and 1970s, Rengo was able to extract concessions from employers by scheduling an annual strike in the spring and banding together with other unions to negotiate beforehand. Now, with declining membership and a shrinking manufacturing base, it remains to be seen whether Rengo or any other union can deliver across-the-board wage hikes that will fuel broader compensation gains, or even inflation.

“I’m not so sure that Japanese consumers are ready to be in consumption mode again,” Lundy said. “This is just corporate Japan coming up the curve of merit-based pay.”

—With assistance from Kanoko Matsuyama and Yuki Furukawa.