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Despite business lobby's request, 3% pay hike appears tough for smaller firms

In this Jan. 5, 2018 file photo, Prime Minister Shinzo Abe, left, gives a speech at a New Year party organized by business groups in Tokyo's Chiyoda Ward. Standing in the center is Japan Business Federation Chairman Sadayuki Sakakibara and to the right is Japan Association of Corporate Executives Chairman Yoshimitsu Kobayashi. (Mainichi)

Although Japan's largest business lobby has urged its member companies to raise wages by 3 percent ahead of annual labor-management negotiations in spring, it will likely be difficult for many companies, particularly small- and medium-sized firms, to comply.

In addition to a repeated request from the government of Prime Minister Shinzo Abe, behind the call by the Japan Business Federation, commonly known as Keidanren, for a 3 percent salary hike is brisk business performance and a serious workforce shortage.

While moves toward pay raises are gaining momentum, a 3 percent hike is the highest level in almost 25 years. As heated debate on "work-style" reform continues, there is a wide variety of challenges that both labor unions and the business community face in the so-called "shunto," or "spring labor offensive."

Touching on that major companies have raised salaries for their employees by around 2.5 percent annually over the past four years and that economic conditions remain brisk, Keidanren Vice Chairman Yasumi Kudo said, "We understand that the prime minister mentioned '3 percent' as social demand" during a news conference on Jan. 16.

Attention has shifted on whether businesses can offer 3 percent hikes after Abe told a meeting of the Economic and Fiscal Policy Council in October last year, "Salary raises are a social demand on companies. We expect that a 3 percent wage hike will be achieved during the 2018 spring labor offensive."

Corporate performance improved in the 2016 business year on the whole, and companies' retained earnings -- the accumulated net income of a corporation -- totaled about 406 trillion yen, the most ever. In contrast, the labor share, which is the ratio of corporate profits allocated to workers, remains low. Public opinion critical of companies being reluctant to raise wages despite their growing profits is putting growing pressure on business communities.

Amid these trends, work clothing retail store operator Workman Co., has decided to raise wages for employees by 5 percent -- a 3 percent hike in base pay in addition to a predetermined 2 percent periodical raise -- in the 2018 business year. Daiwa Securities Group Inc. will increase wages for its employees by at least 3 percent, and raise the rate to 4 to 5 percent or more for those in their 20s and 30s. Life Corp., the operator of a major supermarket chain, is set to raise wages for its full-time workers by at least 3 percent including a base pay hike.

These companies aim to secure high-performing workers by offering better wages amid the growing labor shortage.

At a Jan. 5 New Year party organized by business organizations including Keidanren, many business operators expressed enthusiasm about increasing salaries for their employees. "We need to secure human resources to produce goods with added value," said Suntory Holdings Ltd. President Takeshi Niinami.

The view is echoed by Keidanren's Kudo, who said, "As the workforce shortage has become evident, it goes without saying that companies need to consider how to secure top-quality workers." An advisor to a major manufacturer labeled Prime Minister Abe's calls for wage hikes "a gentle push" rather than pressure, adding, "Even without his request, more companies will raise wages this year (compared to previous years)."

Still, a 3 percent wage hike will be difficult for many businesses -- particularly small- and mid-sized firms that account for 99 percent of Japanese companies -- as the average salary has risen by 2-plus percent annually for four consecutive years.

In fiscal 2017, 55 percent of smaller businesses raised wages for their employees, according to a survey conducted by the Japan Chamber of Commerce and Industry. Over half of these companies cited the need to secure human resources to make up for labor shortages as the reason for increasing pay -- rather than an improvement in their business performances.

"To secure workers, we have no choice but to raise wages in the form of additional overtime allowances regardless of our business performance," said the president of a mold tool manufacturer in Ota Ward, Tokyo. A metal parts manufacturer owner in Higashiosaka, Osaka Prefecture, told the Mainichi Shimbun, "It's tough to increase salaries by 3 percent as the prices of materials are rising, but unless we raise wages, we'll lose workers. Pay hikes are indispensable investments."

"During the upcoming spring labor offensive, major companies that have shown solid business performances will actively respond to labor's demands for pay hikes," says Hisashi Yamada, a Japan Research Institute counselor. He added, "an increasing number of small- and mid-sized firms on the other hand could be forced to raise pay to cope with workforce shortages."

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