By Tetsushi Kajimoto

TOKYO (Reuters – Every March, Japanese blue-chip businesses meet with unions in wage talks. This is where they set the tone for employee pay for the next fiscal year.

Precedent set by the spring wage talks at “shunto”, also impacts wages at small firms who supply large manufacturers. This has significant implications on the no.3 economy of the world. Policymakers desperately want to increase domestic demand after years of deflation.

Below is a summary of this year’s wage negotiations. Click here for a similar story.

WHY IS PRESSURE UNDER COMPANIES THIS YEAR?

Fumio Kishida is the Prime Minister and has asked profitable businesses to raise their wages by 3% or higher this year. He also urged wage negotiations into the public eye.

Since October’s election, he has worked to increase growth and distribute wealth. He calls it “new capitalism”.

A clear picture of how corporates feel about higher wages will emerge from the wage negotiations. It is vital to spur domestic demand. In order to push inflation towards the Bank of Japan’s long-elusive goal of 2%, policymakers are looking to build a sustainable growth cycle.

As the pandemic decimated profits, major corporations offered last year the lowest annual wage rises in eight years. They were below 2%.

Bellwether Toyota Motor (NYSE:) Corp accepted demands from unions, the chief executive stated last week. However, the union and Motor have yet to disclose the increase in pay.

Analysts disagreed, pointing out that it was able to wrap up talks quickly, considering government demands for greater wages.

WHAT WILL THE INCREASE IN THIS YEAR’S MARKET BE?

While analysts expect wage growth to be slightly greater than 2%, as profits rebound from the COVID-19 crisis, it is possible that the amount of the increase will still fall behind price rises. This could result in lower consumer purchasing power.

Hisashi Yamada from Japan Research Institute, senior economist said that “the focus of the year’s negotiations is whether Japan can restart momentum for wage rises which was interrupted by the pandemic.”

His statement said that the Japanese cash-rich companies have plenty of room for raising wages because they are experiencing a historic drop in labour’s profit share and high liquidity levels.

WHY IS JAPAN COMMITTED TO ANNUAL LABOUR TALKS

When the postwar economy was experiencing rapid growth in 1956, “shunto” negotiations were in progress. The unions demanded better wages and improved job conditions through tactics like general strikes in major cities.

With a 33% increase in wages, 1974 was the peak of these talks. After the burst of the bubble economy in 1990s, the increases dropped below 3%.

Since long, unionists are more cooperative than aggressive, and work with managers to achieve the common goal of higher wages rather than job security.

WHAT IS THE TRADITIONAL FOCUS ON BASIS PAY?

The country’s biggest trade union confederation “Rengo” sets a target for increasing base pay during the negotiations. This increase is usually accompanied with one-time bonuses.

A significant amount of annual income can go to bonuses. These bonus payments are frequently reduced sharply or never paid at all in difficult years.

Japan fell into deflation in 2000. Unionists and management agreed not to raise base pay for more than 10 years. The return of Prime Minister ShinzoAbe to power in a second term ensured that modest pay increases were achieved.

Toyota had been the leader in wage negotiations for a long time, but its union recently withheld information on base pay. Instead of focusing on resolving income gaps between workers and their employers, it opted to focus on Toyota.