Japanese Firms Grant Largest Pay Rise in 34 Years Amid Labour Shortages and Inflation Pressure

Tokyo, July 6 — Japanese companies have agreed to raise wages by an average of 5.25% in 2025, marking the largest pay hike in 34 years and underscoring a shift in corporate sentiment amid persistent labour shortages and rising inflation.

The final figure, released Thursday by Rengo, Japan’s largest trade union federation representing over 7 million workers, reflects the third consecutive year of substantial wage growth. The increase surpasses last year’s 5.10% rise and the 3.58% hike recorded in 2022—an unprecedented trend after decades of stagnant wage levels in the world’s third-largest economy.

Separately, Keidanren, Japan’s most influential business lobby, reported that average summer bonus payouts at major companies rose 4.37% year-on-year to a record 990,848 yen ($6,889), signaling continued strength in corporate earnings despite geopolitical and trade uncertainties.

Labour Market Pressures Driving Wage Momentum

Japan’s rapidly ageing population and a shrinking workforce have exacerbated chronic labour shortages, particularly among small and non-manufacturing firms. Some businesses have been pushed to the brink of bankruptcy due to the inability to recruit and retain talent.

A Reuters survey conducted earlier this year found that two-thirds of Japanese firms regard labour shortages as a serious or fairly serious threat to their operations.

The wage hike comes at a time when Japanese consumers are grappling with core inflation of around 3.7%, driven in part by surging fresh food prices. However, unlike in many Western economies, Japanese workers now enjoy heightened bargaining power as employers recognise the necessity of competitive compensation.

“There is an emerging consensus among companies that a pay raise exceeding inflation is essential,” said a senior government official familiar with the discussions. “It’s become the new norm.”

Implications for Monetary Policy and Economic Recovery

Sustained wage growth is seen as critical to fueling a consumption-led recovery, which the Bank of Japan (BOJ) views as a prerequisite for a broader shift away from ultra-loose monetary policy.

According to Mizuho Research & Technologies, wages are projected to rise 4.7% in 2026, assuming a decline in oil prices that would cushion the impact of U.S. trade tariffs on Japanese corporate earnings.

“We expect the BOJ to begin raising interest rates in the January–March quarter, once wage momentum is confirmed,” said Saisuke Sakai, Chief Japan Economist at Mizuho Research.

That outlook aligns with the consensus among economists surveyed by Reuters, with a slight majority forecasting the BOJ’s next 25-basis-point rate hike to occur in early 2026.

Manufacturers to Pass the Baton to Services Sector

However, economists caution that Japan’s wage growth model may need to evolve. Historically, wage hikes were driven by export-oriented manufacturers who benefited from a weak yen. With U.S. tariffs looming, economists say that non-manufacturing sectors—particularly services—must now take the lead.

“Going forward, wage growth will increasingly depend on non-manufacturers, as manufacturers face the brunt of U.S. tariffs,” said Toru Suehiro, Chief Economist at Daiwa Securities, who forecasts average wage growth of 4.5% to 4.9% next year.

Trade Tensions Add Uncertainty

The wage gains come amid heightened trade tensions between Washington and Tokyo, with President Donald Trump threatening to impose tariffs of 30% to 35% on Japanese imports—significantly higher than the 24% rate announced on April 2, which has been temporarily paused until July 9.

Negotiations have stalled, raising concerns within corporate Japan about the future of U.S.-Japan trade relations and the potential impact on global supply chains.

As wage growth continues to accelerate, all eyes are on how Japanese firms—especially small and medium enterprises—will navigate the dual challenge of global headwinds and domestic transformation.