In Japan’s traditionally conservative retail sector, employers are offering substantial pay increases for a second consecutive year. This trend, driven by a combination of economic pressures and demographic challenges, is reshaping the labor landscape, with profound implications for businesses, workers, and policymakers alike.
Japan’s labor-intensive service sector, which includes retail, has long avoided substantial pay raises by relying on a large pool of part-time workers, including retirees and housewives. However, the situation began to change in 2024 due to a shrinking working-age population and rising inflation, making it harder for retailers—employing 10% of Japan’s workforce—to attract and retain staff.
The reluctance to offer wage hikes began to crumble as the scarcity of workers intensified, leading to significant pay increases. This marked a crucial breakthrough for low-wage service businesses and small manufacturers, capturing the attention of policymakers, particularly the Bank of Japan (BOJ).
BOJ Governor Kazuo Ueda highlighted the positive wage outlook during a recent gathering of regional bank executives. The central bank has tied its interest rate policies to a sustained cycle of higher wages supporting higher prices. The BOJ expects this “virtuous circle” to bolster economic growth through increased consumer spending.
UA Zensen, a major labor union representing various industries, is pushing for 6% wage hikes for full-time workers and 7% for part-timers for 2025. This exceeds the 5% target set by Rengo, Japan’s largest union. UA Zensen’s General Secretary Tamon Nishio emphasized that these wage hikes are crucial for achieving real wage growth and a positive economic cycle.
The wage hikes are taking a toll on retailers’ bottom lines. Life Corp, Japan’s largest food supermarket chain, reported a 7.9% increase in labor costs and a 3.4% decline in net profit in the nine months through November. Similarly, Aeon, a major retail conglomerate, experienced a net loss during the same period, with wage hikes raising labor costs by 42.7 billion yen ($270.6 million).
Despite these challenges, retailers feel compelled to continue increasing wages to retain staff in a competitive job market. Takaharu Iwasaki, Life Corp’s president, acknowledged the burden of higher costs but stressed the importance of rewarding workers to secure their loyalty.
Aeon is considering a 7% raise in hourly pay for its 420,000 part-timers, mirroring the previous year’s increases. Executive Officer Motoyuki Shikata noted that wage hikes had positively impacted recruitment, indicating a potential trend toward sustained wage growth.
However, the sustainability of these wage increases is uncertain. The shrinking working-age population, projected to decline by 20% by 2040, and rising labor costs pose significant challenges. Economists like Shinichiro Kobayashi from Mitsubishi UFJ Research and Consulting express skepticism about the long-term viability of continuous wage hikes without corresponding increases in consumer spending.
The crucial question remains whether higher wages will translate into increased consumer spending. Inflation continues to outpace wage growth, dampening the potential boost in consumer purchasing power. This dynamic creates a complex scenario where businesses struggle to raise prices without losing customers.
Some workers, like Miwako, a part-time employee at a major Tokyo supermarket, remain cautious about spending despite wage increases. Her preference to save rather than spend reflects a broader trend of consumer prudence, which could undermine the intended effects of higher wages on economic growth.
