Over 80% of Japan's workers may not be happy with the 'shunto' wage hikes.

• Despite Japan's unions achieving their highest wage increases in decades, not all workers receive the benefits.
• Most unionized workers are employed in large corporations and receive higher wages.
• With inflation affecting all businesses, workers in small and medium enterprises may have to deal with price increases while receiving less generous pay raises.

Following "shunto" negotiations, Japan is predicted to experience the steepest wage increases in 33 years, which led the central bank to raise interest rates for the first time in 17 years. The aim is to boost domestic demand and inflation through higher salaries.

Will the "shunto" hikes be effective for the numerous salarymen?

The Rengo, Japan's largest trade union, announced that its seven million members would receive a 5.28% salary increase in fiscal year 2024, which includes a 3.7% base pay rise.

As of June 2023, only 16.3% of Japan's workforce, who are unionized and expected to receive a pay bump, make up a record low, according to the Japan International Labour Foundation.

The entire population is affected by the persistent inflation that exceeds the Bank of Japan's 2% target since April 2022.

Almost 84% of Japan's workforce was not included in the generous pay raise negotiated by the unions.

Richard Kaye, a portfolio manager at asset management group Comgest, stated in an interview with CNBC last month that it is crucial to remember that the shunto only accounts for a portion of Japanese workers, and therefore does not accurately represent the overall inflation rate in Japan.

Large Japanese companies are likely to benefit from recent wage negotiations, while employees at small and medium enterprises may face rising prices without a corresponding increase in their salaries.

Smaller companies, bigger worries

The report on JILF found that unionized employees were mainly from large corporations, with 39.8% of their employees being unionized and accounting for 67.3% of the country's total union membership.

While companies with 100 to 999 employees had a 10.2% unionization rate, firms with less than 99 employees had a 0.8% rate.

According to a survey by Tokyo Shoko Research, 85.6% of Japanese companies plan to increase wages in 2024.

The survey revealed that large companies had a 8.2 percentage point higher wage and profitability compared to small- and medium-sized enterprises, indicating a growing polarization.

Kaye from Comgest stated that while she frequently communicates with companies attempting to increase prices in Japan, the situation is not as straightforward as some individuals believe. In reality, only 80% of Japanese workers work in companies that are unable to significantly increase wages due to various reasons.

Ikuko Sakata, owner of a trucking firm, stated that despite a tight labor market and high demand, she struggles to make ends meet due to inflation, as reported by Reuters on March 14.

The company based in Tokyo, which she manages, pays its nearly 80 employees the minimum wage, resulting in their base salaries being approximately 280,000 yen ($1,900) per month before overtime, according to the report.

To increase salaries, smaller firms may have to pass on costs, which could result in losing customers or contracts from larger firms. "We attempt to negotiate price increases, but they're only partially successful," she stated. "On average, it's 50%, with 20% to 30% being the norm."

While the increases are currently observed in large companies, Kei Okamura, Japanese equities portfolio manager at Neuberger Berman, believes that there will be a trickle-down effect that will ultimately benefit smaller companies.

"If the large caps continue to benefit from the weak yen, we can expect to see wage hikes in the small to mid-sized space."

Okamura emphasized that the Kishida government is "eager" to encourage large companies to collaborate with smaller-cap firms in cost-sharing negotiations, which could benefit smaller companies by allowing them to raise prices and subsequently increase employee wages.

The anticipated salary increase is predicted to trigger a virtuous cycle, leading to increased spending, which will stimulate consumption and ultimately result in higher prices in an economy that has been plagued with deflation for a long time.

Sustainable growth in the Japanese economy is anticipated to result from a virtuous cycle, following its economic downturn since 1990 due to the bursting of its asset bubble.

From 1990 to 2022, Japan's average GDP growth was 0.94%, lower than the global average of 2.91% over the same period, according to data from the World Bank and CNBC's calculations.