FOCUS: Small Firms in Japan Struggling to Raise Wages

Tokyo, Feb. 1 (Jiji Press)–Both labor and management are hoping to achieve wage hikes exceeding inflation as this year’s “shunto” spring wage talks have fully started in Japan, with large companies, many of which enjoy strong earnings, particularly positive about continuing to offer robust pay increases. By contrast, small companies generally face severe financial conditions and are therefore struggling to keep increasing wages. It is difficult for small companies to narrow the pay gap with large corporations at a time when prolonged inflation is driving up costs and passing the higher costs on to prices remains challenging. Subcontractors Bearing Higher Costs “Our client has told us to make our own efforts (to deal with increasing costs),” the head of a small auto parts maker in Kanagawa Prefecture, eastern Japan, said. “We, subcontractors, are forced to bear all of the higher costs.” The company continues running losses because it has been unable to pass higher labor costs on to prices of its products while sales have been sluggish since the COVID-19 pandemic. According to a Small and Medium Enterprise Agency survey whose results were announced last November, 54.7 pct of first-tier subcontractors had been able to pass increases in labor and material costs on to prices. The proportion was lower for second-tier subcontractors, at 52.5 pct, third-tier subcontractors, at 48.3 pct, and fourth-tier and further subcontractors, at 42.1 pct, although all these figures were up moderately from the previous survey. “Unless the industry as a whole changes, we would be unable to sufficiently reflect higher costs in prices,” an official at a small firm said, pointing to the limits to individual companies’ efforts to negotiate price hikes on their own. Pay Hikes to Prevent Labor Outflows Widespread pay hikes among small companies, which employ about 70 pct of all workers in Japan, are important for the country’s inflation-adjusted real wages to turn higher. In the 2025 shunto negotiations, the overall pay hike rate came to 5.25 pct on a weighted average basis, topping 5 pct for the second straight year. Meanwhile, the rate stood below 5 pct at small companies. The Japanese Association of Metal, Machinery and Manufacturing Workers (JAM), which mainly comprises labor unions at small machinery and metal producers, has decided to demand record monthly pay scale hikes of at least 17,000 yen in this year’s shunto. The figure is far higher than the levels of at least 12,000 yen set by the Japan Council of Metalworkers’ Unions, of which the JAM is a member, with JAM head Katahiro Yasukochi asking member labor unions to “proudly seek robust pay hikes.” But a survey conducted by the Japan Chamber of Commerce and Industry in December 2025 showed that about 70 pct of small companies planning to increase wages in fiscal 2026 said the pay hikes would be for preventing workers from leaving the firms, not for reflecting improved earnings. To ensure sustainable wage growth, small firms need to create room for pay hikes by passing higher costs on to prices and improving productivity, analysts said. New Law Could Be Tool for Small Firms The law on proper transactions with small and midsize contractors, which was established through a revision of the subcontract law, could help more small companies to pass higher costs on to prices. The revamped law, enforced Jan. 1 this year in the run-up to the start of the 2026 shunto talks, requires ordering parties to have price negotiations with subcontractors and is aimed at helping small companies secure financial resources for wage increases by strengthening their negotiating power. The Japanese Trade Union Confederation, or Rengo, and industrial unions are stepping up efforts to make the revised law known. The JAM plans to ask the management side in writing to abide by the law. However, it is not easy to change business practices that have taken root amid deflation, with some expressing pessimistic views. “I don’t think (the law will) change things drastically,” a small company executive said. Still, JAM head Yasukochi said, “We are determined to work steadily on bridging the (pay) gap even if only slightly.” END [Copyright The Jiji Press, Ltd.]