Big Japanese firms offered smaller pay increases at annual wage talks on Wednesday as the economy sputters, tempering hopes that domestic consumption will offset external risks to growth.
Major firms are set to raise wages for a sixth straight year as prime minister Shinzo Abe kept up the pressure on businesses to boost pay in an effort to beat deflation that has dogged Japan for nearly two decades.
But as economic growth slows, firms have grown wary about offering big pay increases because that commits them to higher fixed costs at a time of uncertainty as company profits are levelling off.
Caught between the fear of a profit squeeze and the need to raise pay scales for low-paid part-timers and those employed at small firms to address the country's labour shortages, Japanese firms cannot afford to hike wages much for full-time workers, analysts say.
"Momentum towards wage hikes may weaken as underlying inflation remains weak," said Hisashi Yamada, senior economist at Japan Research Institute.
"Uncertainty is high on the external outlook such as the US-China trade war and Europe's unstable politics. On top of that, a national sales tax is scheduled to increase in October. Without enough wage hikes, it's difficult to defeat deflation."
The results of the "shunto" talks between management and unions - announced by major companies in sectors such as cars and electronics - set the tone for full-time employees' wages across the nation, which have implications for consumer spending and inflation.
A slowdown in the global economy, the Sino-US trade war and trepidation over the final shape of a deal to seal Britain's exit from the European Union have sharply increased strains on businesses worldwide.
Faced with the heightened uncertainty about the growth outlook, cautious Japanese firms focus more on the annual total sum payment including bonuses than monthly base pay, which will determine retirement payment and pension benefits.
Bellwether Toyota Motor Corp, Japan's largest automaker, offered on Wednesday a pay raise of 10,700 yen ($96.21) on average, down 1,000 yen from last year.
"We made the decision as the sales tax rises in autumn, while taking into account the need to raise productivity, competitiveness and respond to unionists' motivations," Tatsuro Ueda, chief officer at Toyota's general administration and human resources group, told reporters.
Honda Motor Co offered a base salary increase of 1,400 yen, down 300 yen from 2018, while Nissan Motor Co came up with a rise of 3,000 yen, unchanged from last year.
Electronics giants such as Panasonic Corp, Hitachi Ltd and Mitsubishi Electric Corp all offered a base pay raise of 1,000 yen, down 500 yen from last year.
"The trend of wage hikes remains intact. I hope wage growth will continue to boost the economy's virtuous cycle," chief cabinet secretary Yoshihide Suga told reporters.
A survey by the Institute of Labour Administration, a think tank, predicted wage growth will slow to 2.15 per cent this year, pulling away from last year's 2.26 per cent and the 17-year peak of 2.38 per cent in 2015, despite hefty corporate cash piles.
A Reuters Corporate Survey last month found a slim majority - 51 per cent of firms polled - saw wages rising around 1.5-2 per cent this year.
But while companies are conservative with pay raises, many have directed their large cash piles toward share buybacks to ensure better returns for their investors.
Pay Hike Or Work-Style Reform
In the coming fiscal year from 1 April, Abe's government will start to implement work-style reform to curb Japan's notoriously long work hours.
The reform also includes "equal pay for equal work" aimed at narrowing the pay gap between full-time employees and contract workers or part-timers, and raising the retirement age to cope with the ageing population.
The move has shifted focus away from pay hikes with both unions and management, dashing policymakers' hopes of stoking a virtuous cycle of a tight job market boosting wages to stimulate consumption and spur inflation to the BOJ's 2 per cent target.
Japan's unions tend not to be so aggressive in pressing their demands as those in the West because they attach greater importance to job security and retain a sense of company loyalty.
The dwindling union membership has deprived unionists of bargaining powers, with companies hiring more non-unionised part-timers and nonregular employees, who represent nearly 40 per cent of workers.
"At this year's shunto, both companies and unions don't seem to put greater emphasis on wage hikes than before," said Kiichi Murashima, economist at Citigroup Global Markets Japan.
"Instead, they are considering a wider range of issues like pay disparity, labour productivity and work-life balance."