Japan is planning the biggest minimum wage hike since it set a pay floor in 1978

An advisory panel at the ministry called for raising the minimum hourly wage for the current fiscal year by 50 yen, according to a government official on Thursday. The 5% increase exceeds the previous year’s 43 yen, marking the highest jump since the government began setting a target for minimum wages in 1978. This will bring the nation’s average minimum pay to 1,054 yen ($6.90) per hour.

The hike in minimum pay follows significant wage gains achieved by workers in wage negotiations earlier this year. In the latest round of pay talks, some Japanese workers secured a pay hike of 5.1%, the largest salary increase in more than three decades, with these gains gradually being reflected in their paychecks, as indicated in the monthly wage report.

Higher minimum wages will likely particularly benefit low-income households, which are most affected by ongoing inflation. The latest consumer confidence survey conducted by the cabinet office showed that sentiment among low-income groups has deteriorated compared to wealthier groups as inflation lingers. 

Sluggish consumption has been a major drag on Japan’s economy, as authorities strive to foster a virtuous economic cycle. Real wages have continued to fall since early 2022, and Bank of Japan officials see weakness in consumer spending complicating their decision over whether raise interest rates at a policy meeting next week, according to people familiar with the matter.

Prime Minister Fumio Kishida set a target last year to raise the minimum wage to 1,500 yen by the mid-2030s, implying an annual gain of around 3.5%. To expedite progress towards the goal, the government outlined measures in its fiscal and economic policy blueprint last month, including efforts to improve productivity and support for investments in automation.

At the same time, higher minimum wages may squeeze smaller firms that have already had to raise pay to stop employees from leaving, despite a lack of improved business conditions. Around 60% of smaller firms said their pay boosts reflected that more negative dynamic, according to a recent survey by the Japan Chamber of Commerce and Industry.

While welcoming the rise in minimum pay as a path toward broader wage gains, Chief Cabinet Secretary Yoshimasa Hayashi said Thursday that the government will make further efforts to help smaller firms pass on labor costs and improve productivity.