Analysis-BoJ interest rate hike plans clouded by small firms’ wage woes By Reuters

Authors: Makiko Yamazaki, Leika Kihara and Kentaro Sugiyama

TOKYO (Reuters) – Japan’s small companies spend far more of their profits on wages than their larger peers and could struggle to hold onto wage increases, raising doubts about whether wage growth could pick up enough for the central bank to continue to increases interest rates.

Next (LON: ) The wage outlook for the year ahead is key to sustaining a consumption-led recovery – a prerequisite for further rate hikes by the Bank of Japan (BOJ).

While Japan has managed to get companies to finally deliver the kinds of wage increases it has been pushing for years, the uneven burden on corporate wages is now complicating the BOJ’s plans to raise interest rates from historic lows.

Policymakers are now considering whether smaller firms, which employ 70% of Japan’s workforce, can continue to meet such wage demands.

Ito Tekko, a foundry maker with about 100 workers in the city of Kawaguchi near Tokyo, has raised wages by more than 11% over the past two years as customers absorb price increases. However, its president Nobuhiro Ito is not sure that such trips could be repeated.

“We’re not sure what we’re going to do next year,” he told Reuters. “We have to make significant investments in renewing our equipment.” Big wage increases would lead to permanent cost increases, so we have to be careful.”

Questions about sustainable wage growth, along with threats of higher tariffs from US President-elect Donald Trump, could prompt the BOJ to delay raising interest rates at next week’s meeting.

Sources told Reuters the BOJ was aiming to keep rates steady at its Dec. 18-19 meeting, as policymakers preferred to spend more time considering next year’s wage outlook.

Japanese wages stagnated for decades until 2022, when rising raw material costs fueled inflation and pressured firms to compensate workers with higher pay.

While big companies are already signaling a willingness to withhold pay rises to attract talent, there is uncertainty over whether smaller firms can follow suit as many lack the global reach and competitive edge enjoyed by their larger rivals.

Small and medium-sized enterprises (SMEs) already spend about 70% of their profits on labor costs, much higher than about 40% for large firms, according to an estimate based on the finance ministry’s July-September corporate survey released last week.

A recent survey found that 68% of SMEs increased wages this year, with most doing so out of necessity – such as retaining workers – rather than improving earnings.

A survey by the Japan Chamber of Commerce and Industry (JCCI) also found that many SMEs say it is more difficult to pass on labor costs compared to the rising costs of raw materials and energy.

“Smaller firms have to expand their borders to raise wages because otherwise they won’t be able to keep workers.” But this is unsustainable,” said Kazuaki Kojima, deputy general manager in charge of research.

UNCONVINCED

BOJ board member Tojoaki Nakamura is concerned about the widening gap between large or fast-growing firms that are able to raise wages, and most SMEs are struggling to do so.

“I’m not convinced about the sustainability of wage growth,” Nakamura, a former Hitachi ( OTC: ) chief executive, said in a speech last week, pointing to still-weak SME profitability.

It would also hurt Prime Minister Shigeru Ishiba’s already low approval ratings with rising living costs hurting households, many of which have yet to see enough wage growth.

As part of efforts to raise wages across the country, Ishiba has promised to outline a plan by next spring to raise Japan’s minimum wage by 42 percent by the end of the decade.

Small firms employing fewer than 300 workers have agreed to increase wages by 4.45% this year, less than the 5.19% at larger firms, according to research by trade union group Rengo.

In a bid to close the gap, Rengo, which has around 7 million members, has set a target of at least 6% wage increases for SMEs in 2025, which is higher than the target of 5% or more for all firms.

Whether small businesses agree to such demands next year will be a key test for BOJ Governor Kazuo Ueda, whose push to continue raising rates depends on sustained wage growth.

“It is important that wage increases are extended not only to large firms but also to smaller firms,” ​​so that inflation can permanently meet the BOJ’s 2 percent target, said a source familiar with the central bank’s thinking.

“There is still uncertainty as to whether that will happen,” the source said, adding that it would be among the topics of debate at next week’s policy meeting.