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Firms Unable to Raise Wages Face Survival Threat in Inflation Era


In March 2024, Weekly Economist Online published an article stating, “Companies that cannot raise wages will not survive in the inflation era.”
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With the arrival of the inflation era, amid a rising eagerness for wage increases, whether or not companies are able to implement wage increases has become a crucial issue that determines their survival or demise. The spring wage increase rate in 2023 was 3.6%, and (5.24% in RENGO’s second tally). However, the focus is placed on expanding this to the overall economy, including small- and medium-sized enterprises (SMEs).

The global economy is transitioning from disinflation to inflation. Issues such as U.S.–China tensions and Russia’s invasion of Ukraine have put an end to the era of integration experienced since the fall of the Berlin Wall, clearly marking a shift towards fragmentation. As a result, leveraging cheap labour from China and other emerging countries has become challenging, and the costs of international trade are rising. Furthermore, with growing concerns about environmental issues and the promotion of renewable energy, energy costs are also increasing.

Due to these factors, the rise in inflation is not temporary, but rather has shifted to a phase where it exceeds 2% on a permanent basis in developed countries. Japan’s economy has also entered a new inflationary phase, with a shift in the trend toward a weaker yen and a rise in service prices due to labour shortages.

The era of “low prices, low wages, and low interest rates” that has persisted for decades has come to an end. Whether or not a company can sustainably raise wages has become a critical factor determining its survival. In an era where costs are consistently rising, only companies that can increase sales, including raising prices, can survive. Companies now need to proactively raise wages and continuously create products and services that customers want, with management and the workers working together as one.

On the other hand, the government’s repeated measures to prolong the lives of companies with substantial deficits have reached their limits, and there are already signs of an increase in the number of bankruptcies. What the government needs to do is to send the message that renewal and transformation are inevitable, and provide strong support for a shift toward sales-increasing management by optimizing price shifting and supporting the revitalization of regional industries beyond the borders of individual firms.
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A deflationary spiral refers to a vicious cycle of deflation (falling prices) and the accompanying economic downturn. In this state, the decline in prices leads to reduced consumption, decreased investment, and decreased employment, negatively impacting the overall economy and causing further deflation. This forms a negative cycle. Japan’s “Lost Decades,” characterized by stagnant economic growth and stagnant wages over the past 30 years, can be attributed to this deflationary spiral.

Japan is now trying to emerge from a prolonged period of deflation. The crucial moment is just around the corner. We are at a critical turning point to see whether or not we can put Japan on the path of a virtuous cycle in which wages rise, consumption expands, companies increase investment, productivity rises, and the Japanese economy is revitalized.

According to the fourth tally of the 2024 Spring Labour Struggle by RENGO (Japanese Trade Union Confederation), as of April 16, the average wage increase for 3,283 unions adopting the average wage increase method was 15,787 yen, or 5.2%—far higher than the 3.7% increase last year.
This is the first time in 33 years that the rate of wage increase has exceeded 5%, which is not only a great achievement but also a sign that the low level of wage increases has continued for too long. Moving forward, it is important that wage increases for workers in small- and medium-sized companies, which account for more than 70% of all employed workers, follow the lead of the major companies and greatly exceed last year’s level.

The consumer price index rose by 3.1% in 2023, marking the highest level in 41 years since a similar 3.1% increase in 1982 driven by the second oil shock. The rate of increase also increased from 2.3% in 2022. This indicates that the price rise is not temporary but has entered an inflationary phase, reflecting a global trend of rising prices.

Therefore, wage increases for workers must surely exceed this level this year and lead to an increase in real wages. Furthermore, to link together the improvement in workers’ lives, enhanced corporate performance, and sustained growth of the Japanese economy in a virtuous cycle, it’s crucial to ensure wage increases that surpass the rate of price rises.

Wage increases should not be determined solely by management based on current performance. It is essential for labour and management to engage in serious negotiations, fully understanding each other’s situation and position, and make the best choices for workers, companies, and the economy.
This year’s wage increases should not be temporary.