Japan's planned record minimum wage hike opens path to sustained GDP growth

Highlights:

• Committee recommends average minimum wage hike of record 3.3%
• Rise reflects PM Kishida's resolve to redistribute wealth
• Minimum wage rise follows offer for higher pay by big firms
• Wage hikes must be sustainable rather than one-off -analyst

Japan's average minimum wage is set to rise at a record pace this year, the government said on Tuesday, a positive development for Prime Minister Fumio Kishida's efforts to cushion households from global commodity inflation.

The health ministry formally approved a recommendation by its sub-committee that the average minimum wage for the current fiscal year ending in March 2023 be raised by 31 yen, or a record 3.3%, from the current level to 961 yen ($7.30) per hour, two ministry officials told Reuters.

Kishida is counting on the hike to drive his flagship policy of distributing wealth to broader segments of the population to put Japan's economy on a sustainable recovery path.

The sub-committee's recommendation, which is made each year and serves as the nationwide standard for minimum wages, was approved as it was made by the wider committee comprising management and labour union representatives as well as academics.

The decision on minimum wages followed annual spring negotiations, which saw big firms offer to raise wages by over 2% to compensate employees for cost-push inflation.

Minimum wages are set by the government unlike the spring wage negotiations, in which salaries are directly set between corporate management and labour unions.

"Given the underlying inflation of over 2% and Japan's growth potential of around 1%, the pace of minimum wage hikes is reasonable, reflecting the premier's commitment to higher wages," said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

"What's important is to drive wages higher in a sustainable manner, rather than making it a one-off move," he said.

The government set a goal to raise the median average minimum wage to 1,000 yen or higher "at the earliest date possible."

Japan's average wages have barely risen since 2000 despite a tight job market as subdued inflation gave companies, many of whom are wary of increasing fixed costs, an excuse to hold off pay hikes.

But that is changing as rising import costs, driven by supply constraints and the war in Ukraine, push up inflation by forcing more firms to raise the prices of goods.

Japan's core consumer prices rose 2.2% in June from a year earlier, a much slower pace than in many Western economies but remaining above the central bank's target for a third straight month.