Japanese firms boosting pay for young workers is good news for Bank of Japan

JAPANESE firms are increasingly boosting starting pay for young employees, potentially building longer-term momentum for overall wage growth in a welcome development for the Bank of Japan as it seeks evidence of a virtuous wage-price cycle.

Companies including Dai-Ichi Life Holdings and Nomura Holdings have announced plans to raise wages for younger staff by 16 per cent.

Some firms are going even further, with Tokyo Electron boosting starting salaries by 40 per cent and Asics pledging to raise pay for incoming college grads by 24 per cent. The figures are all well above average salary gains and inflation in Japan.

The positive news on pay comes as annual wage negotiations have kicked into high gear. If wage gain momentum carries over into this year, the BOJ is expected to end the world’s last negative interest rate regime by April, according to a majority of economists surveyed in January by Bloomberg. 

Young people in particular are benefiting from a labour shortage that’s especially acute in their age group. The number of employed between age 20 and 24 dropped 36 per cent in the past three decades to 4.5 million last year, according to Japan’s labour ministry.

With the national population skewing ever older every year due to a chronically low birth rate, upward pressure on starting salaries should continue as a trend, helping to raise wage levels over coming years.

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“Looking around me, the basic flow of job hunting was to receive job offers from multiple companies and pick your top choice from those,” said Eri Zaizen, a 22-year-old who recently went through the job hunting process and will start a system engineering job in April. “The company I am going to is raising starting salaries this year, and I hear this from other companies as well. I also have the impression that companies are improving their benefit packages in order to attract people.”

In its January quarterly outlook, the BOJ policy board said labour market dynamics will continue to put upward pressure on pay: “Labour market conditions are expected to tighten, partly due to a deceleration in the pace of increase in labour force participation of women and seniors, and upward pressure on wages is projected to intensify.”

Monthly figures show the mismatch in supply and demand with 127 jobs available for every 100 applicants in December.

“The labour shortage has actually gotten worse this year compared with last year, so I think it’s going even more in that direction” of companies not being able to hire as many people as they want to, said Taro Saito, head of economic research at NLI Research Institute. “It’s becoming a seller’s market where people coming into the companies actually may be more powerful.”

Companies are especially concerned about new recruits.

In 2023, about 71 per cent of TSE-listed companies raised starting salaries for all educational backgrounds, an increase from the 41.8 per cent measured at the time of the previous fiscal year’s preliminary report by The Institute of Labour Administration.

“There’s not enough young people, so competition will become even more fierce and starting salaries will keep increasing,” said Atsushi Takeda, chief economist at Itochu Research Institute. “In addition to the decrease in the number of young people, in terms of global competition, it will become increasingly difficult to secure such workers if we don’t raise starting salaries.”

Younger employees in Japan have historically not had much say in their work lives, with expectations of loyalty and overtime work implied when they sign on despite wages levels that are relatively low by global standards, according to the Organization for Economic Co-Operation and Development. Wage levels in Japan stagnated during the two decades of deflation.

The grinding demographics are giving the new generation more leverage to change the situation. Surveys among new graduates show there’s an increasing propensity to switch companies, with wage levels being among key considerations.

“I think our parents’ generation were looking at the company as a place to work forever, and our generation looks at the company as a place to build a first career,” said Zaizen.

While many of the companies that have already announced wage hikes tend to be bigger firms, the trend is occurring in other sectors as well, according to UA Zensen, a labour union made up of majority small and medium-sized firms. 

“The same thing is happening with our firms on a different level,” said Akihiko Matsuura, the President of the union, which is one of Japan’s largest and represents over 1.8 million people. “The managers want to hire and retain the young people, so the funds go to the starting salaries.” BLOOMBERG