The annual negotiation round between entrepreneurs and unions for salary revaluation in Japan-Knowing as ‘shhunto’ in Japanese culture- a year has resulted in the largest rise agreement in 34 years. If last year the same milestone was reached with an initial 5.28% increase (which ended up being 5.1% at the end of the negotiation), this year the Confederation of Japanese Trade Unions (Rengo) has scratched 5.46% in the preliminary pact, although foreseeably it will also be reduced after the debate is the smallest companies. This salary revulsion, however, is not expected to be sufficient to revive numb consumption – one of the main problems facing the country’s economy – since the union represents about seven million employees while the rest of the ‘real’ salaries remain crushed by inflation.

The first speculation generated by the initial agreement has to do with the Bank of Japan due to the possibility that the solid increase reinforces its confidence in the economy and supports a greater adjustment. Last year, the BOJ raised interest rates for the first time in 17 years in March, a few days after Rengo published the preliminary agreement. Following a similar calendar, the Central Bank of Japan will present its last decision on monetary policy on March 19, five days after the level of the rise is known, although economists surveyed by Bloomberg do not foresee changes in monetary policy in that appointment.

Although most analysts do not foresee another type of types before summer, the results of the spring salary negotiations continue to give clues about the time of the next rise. Hideo Kumano, executive economist of the DAI-HICI Life Research Institute and former official of the Bank of Japan (BOJ), has indicated in statements to Bloomberg that “the BOJ must be gaining confidence in the salary inflation cycle. Julio is the probable time for the next rise of types, but now it is possible that he starts considering the meeting of June or May as possible dates.”

BOJ officials, including Vice Governor Shinichi Uchida, have recently indicated that the reference interest rate continues in a gradual ascending trajectory, subject to economic reality. In its January perspective report, the Bank of Japan projected a continuous increase in employee’s income due to the still restrictive labor market conditions. However, Kazuo Momma, former executive director of the BOJ, declared earlier this week that the Central Bank would not be inclined to an anticipated increase unless Rengo’s results exceed 5.7%.

Million’s question about consumption

Until the end of summer, the definitive rise will not be known but regardless of a percentage of final rise. Negotiation with smaller companies, which use approximately 70% of Japan’s workforce, and could be opened with increases of just over 5% for the first time since 1992.

Evolution of salary increase agreements in Japan since the 90s.

The ‘Million question’ until then questions whether the increases will lead to a significant leap in consumer spending. The answer is hidden behind workers under the union umbrella: they are 16% of Japan’s workforce.

Despite the salary increases noted by the unions last year, maximum in more than three decades, real salary growth remains irregular in a context of stagnant inflation on the heights. Japan’s general inflation reached 4% in January (maximum two year) before a weak yen that raised import costs and slowed the growth of the available income. This price increase has affected consumers, as evidenced by the latest data confirming that households spent much less than expected in January.

The salary path does not compensate inflation. In data from the Ministry of Labor, real wages fell 0.3% year -on -year in 2024, prolonging the run of falls to three years. In addition, low productivity and uncertainty about YEN and the global economy are leading to the capacity of companies to continue raising salaries.

This scenario is the Achilles heel of Prime Minister Shigeru Ihiba, which a little more than a month ago its majority in the lower house after assuming last October and in summer faces the elections to the upper house. Takahide Kiuchi, executive economist of the Nomura Research Institute, considers that “Istiba should focus on stabilizing prices to increase real wages.” Some of the measures applied by the president to alleviate the effects of prices on wages are the increase in the tax -exempt income threshold to boost the available income or release of emergency rice reserves to reduce the price of a basic food in that country.

Internal demand, anti tariff shield

For Ishiba and for the Bank of Japan, a solid domestic demand is essential, and more at a time when the world economy faces a growing uncertainty before the trade war initiated by US President Donald Trump with his avalanche of tariffs throughout the world. These US protectionist measures will also impact the Japanese economy and external demand, so strengthening domestic consumption becomes even more necessary.

It should be remembered that the reviewed data of Japan GDP published at the beginning of the week showed that the Japanese economy grew moderately in the last quarter of 2024, driven by net exports, while private consumption remained slow.

In the spending of young people there is hope. Shinichiro Kobayashi, main economist at Mitsubishi UFJ Research and Consulting, has pointed out for Reuters that the salary increases that young people have been reaping for three years make them the most anticipated promoters of consumer spending. The key is that they leave behind the uncertainty about the future that leads them to bet on savings more than consumption, but the general context does not contribute to tranquility.

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Why the greatest salary increase agreed in Japan since 1991 will have difficult to revive consumption