TOKYO - Big Japanese companies look set to formally offer hefty pay hikes at annual wage talks with unions that wrap up on March 13, a move that will virtually cement the case for the central bank to phase out its unprecedented monetary easing in the coming months.

Economists see the wage negotiations resulting in an average increase of around 3.9 per cent in annual pay for union workers at major firms. This would be the biggest rise in 31 years and heighten expectations that the Bank of Japan (BOJ) would end negative interest rates by April.

The central bank has long contended that robust wage growth was a prerequisite for rolling back more than a decade of a radical monetary experiment that has aimed to lift Japan out of a protracted cycle of deflation and economic stagnation.

The annual “shunto” negotiations, long a defining feature of Japanese business, were closely watched in the high-growth era, but became less important in the decades after the asset bubble burst in the early 1990s as companies scrambled to shed the three excesses of debt, workers, and plant and equipment.

Three decades on, wage negotiations are once again in the spotlight. Prime Minister Fumio Kishida has made pay increases a top priority as he looks to put an end to the years of meagre wage growth that have kept well behind the average for the Organisation for Economic Cooperation and Development grouping of rich countries.

“This year, big firms will probably offer wage hikes of near 4 per cent, which should prompt the BOJ to end negative rates in April,” said Norinchukin Research Institute chief economist Takeshi Minami.

A fierce labour crunch in Japan has also driven home the message that companies need to increase pay, Mr Minami said.

“Businesses can no longer stay afloat if they don’t offer attractive pay to bring in young talent,” he said.

While the wage talks directly impact workers at the biggest firms – a sliver of the workforce – they set the tone for the rest of the economy. Toyota Motor, for instance, has long been seen as a pacesetter.

Wage increases are increasingly important to attract workers as Japan is now grappling with higher prices, said Itochu Economic Research Institute chief economist Atsushi Takeda. That is also a big change from the past three decades when prices also budged little.

Japan’s largest trade union confederation, Rengo, has demanded pay rises of 5.85 per cent in 2024, topping 5 per cent for the first time in 30 years.

Unions representing workers in industries, including automobiles, electronics, metals and heavy machinery, as well as in the service sector, have followed suit, demanding record pay hikes. Many of their demands are expected to be fully met.

“Strong pay offers are a done deal,” a senior government official said, requesting anonymity. “The BOJ could end negative rates in either March or April, if it wanted. It’s just a question of timing.”

Even though Japanese companies have been raising pay, the increases have largely failed to keep up with inflation.

Real wages, which are adjusted for inflation, have now fallen for 22 straight months. In January, the latest month for which data is available, real wages fell 0.6 per cent year on year.

With inflation running at or above the BOJ’s 2 per cent target for nearly two years, nominal wages need to accelerate by more than 0.5 per cent, meaning that the outcome of the wage talks would need to be a 4.5 per cent increase to beat inflation, said Norinchukin’s Mr Minami.

Toyota workers are seeking pay rises of up to 28,440 yen (S$256) a month and a record bonus payment worth 7.6 months of salary. The world’s largest carmaker by volume is expected to formally respond to those requests on March 13.

Rival car companies Honda Motor and Mazda Motor struck early deals in February, meeting union demands in full.

One important question is whether the pay hikes would continue from 2025 and after – and whether they will spread to smaller firms, which employ seven out of 10 workers in Japan.

Smaller companies tend to have less leverage to pass on costs to clients, making it harder for them to raise pay.

In 2023, the anti-monopoly watchdog laid out guidelines aimed at making it easier for smaller companies to pass on higher labour costs to bigger customers.

Tokyo has also extended collaboration between government, labour and management to regional levels so that the three parties can work together to improve wages across the country.

To overcome a labour crunch, Professor Hisashi Yamada of Hosei University calls for improving productivity at small firms, many of which engage in labour-intensive operations.

“Small firms must boost productivity by investing in labour-saving technology such as automation and robots,” said Prof Yamada, an expert on labour issues. REUTERS