Japan wage hikes: Are they enough?

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Japan's spring wage negotiations yielded strong results this year, but economists are questioning whether it will be sufficient to help lift the country out of its economic mire.

Annual labor-management negotiations, known as shunto, concluded on Wednesday. Toyota Motor, Japan's largest company by operating profit, announced that it will increase monthly pay by 4,000 yen, up from last year's wage hike of 2,700 yen. Panasonic employees will receive a base-pay hike of 3,000 yen, versus a 2,000 yen increase last year, and Nissan Motor offered a 1.4 percent, or 5,000 yen, raise. All increases exclude automatic increases in seniority pay.

The results mark two consecutive years of wage growth and are encouraging, Masayuki Kichikawa, managing director and chief Japan economist at Bank of America Merrill Lynch (BofAML), told CNBC on Wednesday.

However, two major questions remain: will small-and-medium sized firms (SMEs) follow their larger counterparts; can the increases offset the three-percentage-point increase in Japan's consumption tax last year?

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Wage hikes are crucial to Prime Minister Shinzo Abe's goal of achieving 2 percent inflation. Since coming to power at the end of 2012, the Japanese leader has persistently asked corporates to increase hiring, raise salaries and lift capital expenditure as part of his plan to boost consumption, a task that became particularly hard after the April 2014 consumption tax increase tipped the country into a technical recession.

Will SMEs follow?

Smaller firms are expected to follow suit with wage hikes but not to the same extent as bigger firms, experts say.

"Last year, we saw a 0.4 percent increase in base pay across all companies, according to official data. So we'll probably get something like a 0.6 percent rise this year if the ratio between big firms and small firms remains the same," Marcel Thieliant, Japan economist at Capital Economics, said over the phone.

However, that's still below the Bank of Japan's (BOJ) expectations, he said. In January, major media outlets reported that the central bank believed a 1 percent gain in average base wage pay was needed to support the government's reflation program.

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The yen's 20 percent depreciation against the U.S. dollar over the past 12 months has hit small and medium-sized firms particularly hard. A report from Japanese research firm Teikoku Databank earlier this year showed a record number of small businesses declared yen-related bankruptcies last year.

A Reuters poll released on Tuesday showed that only 14 percent of 230 firms surveyed would increase wages by a higher amount than last year.

BofAML's Kichikawa was more optimistic: "There's a good chance that wage hikes at large companies will spread over to smaller companies [this year]," noting that even in companies with less than 29 employees, wages are still seeing year-on-year growth, compared to declines last year.

Offsetting inflation

Sentiment is mixed whether this year's wage growth will translate into higher spending, especially as the collapse of oil prices weighs on consumer price inflation and as households tone down inflation expectations.

Oil prices have declined around 50 percent over the past year to six-year lows, foiling the BOJ's reflation efforts. In January, core consumer inflation excluding the impact of the consumption tax hike was 0.2 percent, down from a peak of 1.5 percent last April.

"We should see a continued improvement in private consumption, but not huge," said Thieliant.

On the other hand, Harumi Taguchi, principal economist at IHS Global Insight, said in a note that progress on wages was good enough to make the BOJ less concerned about the impact of lower oil prices on inflation.