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Kishida’s Unfinished Business: Political Economy of Wage Increases in Japan

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Kishida’s Unfinished Business: Political Economy of Wage Increases in Japan

The battle against wage stagnation, a key goal of Kishida’s Cabinet, cannot be won without empowering labor unions.

Kishida’s Unfinished Business: Political Economy of Wage Increases in Japan
Credit: Depositphotos

Japanese media recently reported that Prime Minister Kishida Fumio’s approval rating stands at 26 percent, up just slightly from the 23 percent recorded in December 2023. The two figures are the lowest approval ratings for Kishida since the establishment of his Cabinet in October 2021. In the midst of political fundraising scandals, Kishida is attempting to regain public trust and confidence. 

For Kishida’s government, the targeted issues areas have to be the battle against wage stagnation, the empowerment of labor unions, and the promotion of unionization among non-regular workers as well as employees of small and medium enterprises. 

A markedly slow growth rate in disposable income has had detrimental effects for the Japanese economy. It led to weak consumption, resulting in a decrease in demand within the domestic market. Therefore, the growth of Japan’s GDP, 52 percent of which was derived from domestic consumption, stagnated. Diminishing personal consumption compelled producers and retailers to engage in fierce competition by reducing the prices of commodities significantly. This led to a decrease in sales revenue and an inevitable stagnation in income growth. This cycle essentially contributed to the further shrinking of demand, triggering economic stagnation over the past three decades. 

Also, Japan’s labor productivity ranking has continued to deteriorate over recent years. It was ranked 21st in 2010, but the latest data from 2021 shows a decline to 29th among OECD members.

Under the Kishida administration, an increase in disposable incomes has become one of the key objectives of his economic policy. This approach has garnered positive attention as a potential strategy to break free from deflation while carefully balancing a recent sharp increase in prices.

In the past year, there have been several important changes in the economic environment. Corporate profitability has seen a resurgence due to overcoming the COVID-19 pandemic, a sharp increase in inbound tourism demand, and an increase in exports fueled by the depreciation of the Japanese yen. 

Notably, large firms such as Toyota and Nintendo were anticipated to achieve a record high in net profit for the 2023 fiscal year. Additionally, the internal reserves that corporations built up have attained their highest level in the last 11 years. 

Other important changes include a rise in domestic commodity prices stemming from geopolitical conflicts in Ukraine and the Middle East, leading to a fluctuation in crude oil and natural gas prices. There is also a severe labor shortage resulting from a decline in the birth rate and an aging population. 

An increase in internal reserves, alongside price hikes and labor shortages, can potentially be used by corporations to drive up wage levels. Yet, to date, pay rises have not been as consistent as expected. In contrast, wage growth has failed to keep pace with continued rise in inflation, leading to a relative decline in real wages for the 19th consecutive month

An increase in non-regular workers, a relative decline in labor productivity, and Japan’s employment systems, which traditionally pose challenges for employers in terminating employees, are recognized as contributing factors to the relative decline in real wages.

However, the diminishing influence of the labor movement represents a substantial yet often overlooked factor in Japan’s struggle for an increase in real wages.

A key strength of Japan’s economy has been its labor-management relations, which tended toward a more collaborative relationship, thereby making it relatively easy for corporations to keep labor costs low. The collaborative relationship in labor management originated from the tradition where enterprise unions were predominantly formed within individual corporations rather than on an industry-wide basis. 

In this unique labor-management structure, individual unions often became segmented and took more decentralized actions rather than collective actions. With this segmentation, labor unions’ leverage over corporations was severely limited. Simply put, Japan’s unions are not at the center of the labor movement

The case of Japan is in contrast to recent labor movements in some Western countries such as strikes by American auto workers and British public workers

To be fair, Japan’s nationwide labor union, Japanese Trade Union Confederation, also known as Rengō, was founded in 1989, and currently, it comprises over 7 million members. Although the trade union density rate – the proportion of workers that are union members – in Japan has declined to approximately 17 percent, this rate matches that of the United Kingdom, and remains relatively high compared to the United States’ rate of around 10 percent.

A crucial distinction between the labor movement in Japan and those in other countries lies in the frequency of labor disputes. Despite the worsening labor environment in Japan, characterized by a decline in real wages and excessive overtime work, labor disputes have become increasingly rare. In 2022, there were only 65 cases of labor disputes, with a total of just 6,447 active participants in those disputes. Even when workers do engage in strikes, they typically last from half a day to a single day. 

In situations where labor disputes are infrequent, corporations have minimal, if any, incentive to raise wages. Where workers (are forced to) accept lower wages, often coupled with overtime work, employers have little motivation to distribute profits through pay rises. Instead, they tend to save these profits as internal reserves or pay dividends to shareholders. 

A sluggish pace in pay rises, weakened labor unions, and corporations leveraging this situation to bolster internal reserves – this precisely encapsulates the current scenario in Japan. Kishida needs to address these issues holistically. 

The issue extends beyond the unions’ inability to undertake effective labor movements. Progressive parties, traditionally allied with labor unions, have weakened politically. The Democratic Party of Japan (DPJ), which was in power between 2009 and 2012, has since been divided into two opposition parties: the Constitutional Democratic Party (CDP) and the Democratic Party for the People (DPP). 

As of December 2023, the approval rates for the CDP and the DPP stood at 7.4 percent and 2.1 percent, respectively. Despite the Kishida-led Liberal Democratic Party (LDP) facing serious challenges due to political fundraising scandals, its approval rating of 29.5 percent still surpasses those of the CDP and DPP. Labor unions, once strong supporters of the DPJ, now find their support divided between these two minor parties.

As the ties between those progressive parties and labor unions have become weaker and less stable, Kishida’s LDP has proactively sought ways to collaborate with Rengō in efforts to, in his words, take all possible measures to increase disposable incomes and completely get rid of deflation. In October 2023, Kishida attended Rengō’s annual convention and discussed the possibility with Chair Yoshino Tomoko.  

Ironically, it is the LDP, a conservative party, that has shown a strong commitment to achieving pay rises. For instance, under the Abe Shinzo administration in 2013, the government-labor-management conference was established, and it provided a platform for dialogue between labor and management. During the meetings, LDP consistently advocated for the need for wage increases to business leaders. 

This effort by the LDP led to an average wage increase of 2.2 percent in the 2022 “Shuntō” wage negotiations. In 2023, the average increase rose to 3.6 percent, the highest in the past three decades. Except for 2020, the hourly minimum wage has also seen a steady increase, reaching 1,000 yen nationwide in 2023.

Nevertheless, Kishida still continues to face challenges. Despite these efforts, real wages continue to decline as wage growth fails to keep pace with the recent rise in inflation. This trend is particularly apparent among small and medium enterprises in Japan, where 70 percent of employees work, as their wage growth lags behind that of large enterprises. 

For Kishida to regain voter confidence, an ongoing commitment to further wage growth is essential. Presently, the Kishida administration “requests” corporations to consider and undertake wage growth. To move beyond this request-based approach, Kishida needs to create a positive momentum for a rise in real wages and reinvigorate domestic market demand. 

Long-term economic growth will require substantial reforms, such as empowering labor unions by enhancing their negotiation power with employers and promoting unionization among non-regular workers and workers of small firms. Whether the Kishida administration has the ability to implement such fundamental reforms will be crucial to its success and the future of the Japanese political economy.

Guest Author

Hironori Sasada

Professor Hironori Sasada is a professor in the Modern Japanese Studies Program at Hokkaido University. He has published various peer-reviewed journal articles and is the author of the book “The Origin of Japan’s Protectionist Agricultural Policy: Agricultural Administration in Modern Japan” (Routledge, 2023).

Guest Author

Tadashi Iwami

Dr. Tadashi Iwami is a lecturer in the Modern Japanese Studies Program at Hokkaido University. He has published articles in peer-reviewed journals, including Pacific Review and East Asia Policy.