EAST ASIA FORUM



 

 
In Brief

After three ‘lost decades’ of economic performance, wages in Japan showed signs of positive growth in 2024. To deliver sustained increases to real wages, Japan must improve labour productivity growth. Whether the ‘new trinity’ of labour market reforms will successfully do so requires policymakers to address structural labour market challenges faced by both workers and employers. Due to their complexity and sensitivity, this is far easier said than done.

After 30 years of stagnant growth, Japan’s nominal wages increased by 5.1 per cent in April 2024 as a result of the ‘spring wage offensive’, an annual collective bargaining process where labour unions negotiate with employers for better wages.

The government has been campaigning for real wage growth as part of its ‘New Form of Capitalism’ program, an initiative introduced by former prime minister Kishida.

Kishida’s economic strategy aimed to achieve inclusive economic growth through a virtuous cycle of economic expansion and equitable income distribution, with nominal wage increases serving as a step towards higher real wages.

The government is eager to see another significant rise in nominal wages in the 2025 spring wage negotiations. Compared to other developed countries, Japan’s real wage growth has been significantly lower. Between 1991 and 2021, Japan’s real wages increased by only 1.05 times. Meanwhile, real wages in the United States, United Kingdom, Germany and France rose by 1.52, 1.51, 1.34 and 1.34 times respectively.

Sustained real wage growth requires high labour productivity growth. But Japan’s ranking in labour productivity among OECD countries declined from 21st out of 35 in 2000 to 29th out of 38 in 2023. During the same period, Japan’s labour productivity relative to the United States dropped from 71.4 per cent to 58.2 per cent.

Improving labour productivity can be achieved in various ways, such as an increase in capital investment and innovation. In relation to labour, productivity may be improved by enhancing labour quality, allocating labour more efficiently within companies and facilitating labour reallocation across companies and sectors.

To address these issues, the Japanese government is accelerating the implementation of the so-called ‘New Trinity’ labour market reforms, introduced in May 2023 under the ‘Council of New Form of Capitalism Realization’.

These reforms aim to increase wages, narrow wage gaps between Japanese and foreign companies for similar roles and eliminate wage disparities based on gender, age and other factors through public and private collaboration. They also aim to lift the proportion of workers experiencing wage increases through job changes over those experiencing wage decreases.

The New Trinity consists of three pillars — support for skill enhancement through reskilling, introducing a job-based pay system and facilitating labour mobility in growth sectors. These pillars align with the factors necessary for labour productivity growth.

The government has proposed various policies to address challenges in each area. Reskilling is essential for Japanese workers, especially as they face longer careers in the era of 100-year lifespans, so that they can adapt to rapid changes driven by the green transformation and digital transformation.

Japanese companies invest significantly less in human resources compared to their counterparts in other developed countries. Between 2010 and 2014, the proportion of human resource investment in GDP was only 0.1 per cent for Japanese companies, compared to much higher levels of 2.08 per cent and 1.78 per cent for US and French companies respectively.

To address this disparity, the government plans to increase financial support for workers. Unlike traditional methods that channel support through companies, the new approach will emphasise direct support to workers.

The shift to a job-based pay system marks a departure from the seniority-based system that was effective during Japan’s post-war economic recovery. A job-based system establishes clear standards for roles and required skills, enabling objective and transparent performance evaluations.

Recognising that companies vary in their approaches — such as implementing job posting systems or employee performance improvement plans — the government provides model cases as references rather than imposing specific mandates.

For facilitating labour mobility to growth sectors, major obstacles have been identified from the perspectives of both workers and employers.

From the workers’ side, traditional practices such as the seniority-based pay system and preferential tax treatment for a lump-sum salary paid at the end of employment favour long-term employees discourage inter-firm movement.

From the employers’ side, dismissal regulations and the lifetime employment system, which are commonly adopted by large companies, pose significant challenges.

These regulations require employers to provide reasonable cause and need for dismissal. Courts in Japan often side with employees in disputes, emphasising job security.

While the government has outlined measures to address worker-related obstacles, it has not tackled those faced by employers, likely due to the complexity and sensitivity of the issue.

The effective implementation of the New Trinity reforms is expected to improve labour productivity. But the impact on inter-firm and inter-sectoral labour mobility will remain limited unless dismissal regulations are appropriately addressed — such as through the increased use of financial compensation and effective reemployment support for dismissals — to promote inter-firm and inter-sectoral labour mobility. Robust unemployment compensation and a sound social safety net are essential to support these measures.