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TOKYO – Japan is seeing early signs of achieving a positive cycle of rising inflation and wages, Deputy Chief Cabinet Secretary Hideki Murai said on Tuesday, stressing the administration’s focus on broadening pay increases beyond big companies.

The government is ramping up efforts to change Japan’s long held practice in which big companies use their huge bargaining power to pressure smaller suppliers into accepting price cuts.

In guidance released in November, the government required companies to have executives take more ownership in the price-setting procedures, and clarified for the first time the chance of sanctioning firms that put undue pressure on suppliers to cut prices.

The steps underscore the focus Prime Minister Fumio Kishida is putting on boosting profits of smaller firms, which they can then use to hike wages, Murai told Reuters in an interview.

“We’ve made clear what companies ought and ought not to do” in price-setting negotiations, said Murai, who oversees the government’s initiative to ensure the guidance is met.

“It’s important to embed new business practices so that costs are appropriately passed on throughout the supply chain.”

The administration has made achievement of broad-based wage hikes a top priority as rising inflation pushes up households’ cost of living.

Some big firms have announced plans of bumper pay hikes to retain talent and compensate employees for rising inflation. But there is uncertainty on whether small and mid-sized firms, which employ 70% of the total number of workers in Japan, will follow suit as rising raw material costs hurt their margins.

“We need to revitalise the economy by shifting away from one that prioritises cost cuts, to one where a positive cycle of higher growth and wages kicks in,” Murai said. “We’re gradually seeing such (a) positive cycle fall into place.”

The Bank of Japan (BOJ) is also focusing on whether wages rise sustainably, which it as set as a prerequisite for exiting ultra-loose monetary policy. Many market players expect the bank to end negative interest rates either in March or April.

Murai declined to comment on whether conditions have been met for the BOJ to exit negative interest rates, saying the decision fell under the jurisdiction of the central bank.

The BOJ has said whether or not to sustain accommodative monetary conditions, including negative rates, will depend on economic and price developments at the time, Murai said.

“We hope the BOJ continues to work closely with the government and guide monetary policy appropriately” to sustainably achieve its price target, he said.

In an effort to reflate growth and keep inflation stably at its 2% inflation target, the BOJ currently guides short-term rates at -0.1% and the 10-year government bond yield around 0%.

  • Published On Mar 5, 2024 at 08:00 PM IST

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