By Tetsushi Kajimoto

TOKYO (Reuters – Japan’s leading firms plan to increase their pay by around 2% in annual labour talks that conclude Wednesday. It is a welcome boost after last year’s razor-thin increases, but unlikely to spark domestic demand in a stagnant economy.

Fumio Kishida, the Prime Minister of Japan has put pressure on companies that make a profit to raise their salaries by 3% or higher as part his campaign to expand wealth.

The third largest economy in the world is still struggling with low wages. Companies and households have a tendency to save money rather than spend, due to decades of deflation. These wage rises set the standard for the rest and must be monitored closely.

Analysts will be focusing this year on whether or not companies will increase pay by at least 2%. Last year, blue-chip firms offered their lowest annual pay rises in eight years at 1.86%. According to economists, any increase in wages for workers will likely be countered by increases in food and fuel prices.

Rengo is calling for a 4 percent increase in the wages of its trade union members. Japanese firms are cautious as always.

Corporate Japan already has $2.8 trillion of cash and deposits. Managers point out the Ukraine crisis and spiking oil prices as reasons to save.

The pandemic hampered pay increases last year, complicating further the central bank’s efforts to achieve 2% sustained inflation.

Automobile manufacturers, who have a strong impact on national wage talks, already agree to fulfill their union demands fully.

Many companies have begun to shift away from a uniform approach towards remuneration, with some adopting a different strategy. They are focusing more on merit-based salaries than seniority-oriented compensation to attract talented talent.

It coincides with changes to the labor market. Around 40% of the workers comprise part-time and contract staff, a double figure from 1990. This is despite many workers not belonging to labor unions.

The labour talks will also focus on improving working conditions and minimum wage for low-paid “nonregular” workers. Other than wages, topics such as labour productivity and reform of the work-style will be addressed.