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Japan business lobby to encourage members to let small firms pass on costs

[TOKYO] Japan's most powerful business lobby, Keidanren, agreed on Thursday to encourage companies to allow subcontractors to pass on higher costs as the government tries to relieve a squeeze on profit margins at small firms.

Rising input costs have become a contentious issue for subcontractors because many complain their clients are refusing to pay more for parts and materials even though manufacturing costs are increasing.

Japanese Prime Minister Shinzo Abe is trying to combat criticism that his economic policies have left behind the country's army of small- and medium-sized enterprises who rely on subcontracting work from blue chip firms.

The government's direct appeals to Japan's main business lobby, however, raise concerns that regular intervention in the private sector may not produce the intended results and lift economic growth.

"I am not going to criticise the government, but at the end of the day there is a limit to the government's ability to influence decision making," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities. "You could say it is interventionist."

The agreement came out of a regular meeting with cabinet ministers, business lobbies and labour unions that has become the launch pad for some of Mr Abe's most important economic initiatives.

Keidanren will encourage its member companies to agree with their subcontractors in advance how to pass on higher input costs and share the burden from exchange rate fluctuations as the weak yen pushes up import costs.

The government will publish examples of companies that have already made similar agreements and increase on-site inspections to make sure companies do not violate fair trade rules.

The yen has fallen around 29 per cent versus the dollar since Mr Abe took office in late 2012 as his ruling party approved a central bank governor that pursued radical quantitative easing to prevent a return to deflation.

Large exporters have benefited from the yen's decline as this has pushed up their earnings, but small firms complain they are stuck with higher import costs they cannot easily pass on to their clients or consumers.

The meeting with cabinet ministers, business lobbies and labour unions, which was held earlier on Thursday, is the same forum where Mr Abe convinced big firms to raise pay for their workers for two consecutive years.

The government regularly cites this agreement to raise wages as proof that its policies will spur economic growth, but some economists doubt pay raises will spread to smaller firms which employ the majority of the country's workforce.