Real wage growth in Japan has lagged far behind other G7 countries, at only 3% since 1991 (Figure 1).
Generally, the reason for why Japan’s wage growth fell behind is explained by two contributing factors.
01
Amid the uncertain outlook after the economic bubble burst in early 1990s and the collapse of Lehman Brothers, Japanese companies began focusing on increasing retained earnings. As a result, profits since then have not been fully allocated to labor costs.
The labor allocation ratio in larger organizations was less relative to workforce growth than among small- and mid-sized companies. This lower ratio created a perception that there was room for better wage growth for more sizeable companies. Additionally, an increase in hiring non-regular employees may have weakened workers' bargaining power in labor-management negotiations, as non-regular workers are less likely to join unions that than regular employees.
02
Different types of employees, whether part-time, contingent or contract workers, has led to an increase in the number of informal workers in Japan’s workforce. An increased emphasis on labor conditions other than wages plus the rise in part-time workers with relatively short working hours and tenure ultimately resulted in a decreased in per-person wages.
For the first time in almost 30 years, Japan’s salary-increase rate broke the 3% mark, increasing to 3.6% in 2023 and 5.1% in 2024, according to the Japanese Trade Union Confederation (also known as Rengo). This historic increase was in response to high prices triggered by global inflation and the surge in the price of raw materials after Russia’s 2022 conflict with Ukraine began. However, other circumstances also influenced this jump.
Union negotiations typically begin in February or March, as most Japanese companies typically begin their fiscal year in April. Uniquely, with this timing the government takes the lead in this so-called “spring labor struggle.”
Specifically, Japan’s government introduced a tax system to promote wage increases not only for larger organizations with more financial resources, but also for small- and medium-sized companies. The government also holds meetings with organizations and the Japanese Trade Union Confederation to exchange opinions regarding economic topics including salary increase
When inflation is high, larger companies are more easily able to pass along price increases compared with small- and medium-sized companies. In turn, this improves large companies’ profit margins. Larger Japanese companies are also competitive for goods and services in international markets (e.g., manufacturing), with trade surplus. Finally, the weak yen provided a tailwind for larger organizations, allowing them to increase wages substantially. It is important to note that, as of this writing, the wage suppression effect of U.S. tariffs is a concern, as it may damage the Japanese economy.
Especially since 2023, prior to the spring struggle, some leading large-scale organizations announced their intention to raise wages in the next fiscal year, around December. These announcements were widely reported in the media, and all organizations heard this message. With a strong sense of competition in Japan’s business market, many companies revisited their own salary increases — and even met with competitors to try to find out what others were planning so as not to fall behind.
While salary increases have been on the rise, there has not been stability sustained positive increases in real wages. As such, employees will continue to demand higher increases in response to the cost of living.
Japan’s low labor productivity (32nd out of 38 OECD member countries) and a declining birthrate and an aging population has led to a chronic labor shortage, making salaries and salary increases a key tool for attracting and retaining talent. Though 2025 salary increase rates have not been finalized as of this writing, early indicators show that the rates are slightly above 2024 levels. Organizations will continue to focus on where final increases will land.
Traditionally, Japanese companies have hired and trained new college graduates in batches. Recently, though, more companies have started to invest in learning and development opportunities for existing employees. They have started introducing skills-based pay and reskilling to attract and retain highly specialized talent.
This change in approach will affect labor market growth and, in the long run, salary increases may occur structurally — not uniformly. Non-Japanese companies are tending to raise wages at a lower rate than Japanese companies, according to a WTW pulse survey conducted in December 2024. If Japanese companies continue or raise their current salary-increase pace, this will have a definitive effect on their ability to compete for talent.
For Japanese employees, working for non-Japanese companies carries risks such as layoffs due to the company’s withdrawal from Japan. Non-Japanese companies that now benchmark their compensation levels above those of Japanese companies in response to this risk need to re-evaluate their compensation strategy as they may not be able to compete with Japanese companies that are offering long-term employment security. Leveraging trusted compensation survey data will support salary increase decisions among both Japanese and non-Japanese companies, providing them an opportunity to flexibly respond the labor market changes.
