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Wage rise expectations increase burdens for Japan's small business

Nimbari Kosakusho, an Osaka Prefecture-based company specializing in sheet metal processing, is raising its base pay for the first time in over 10 years amid improved earnings.

TOKYO -- Growing upward pressure on wages is creating a cost headache for small business in Japan.

     Decisions to raise wages by large companies this spring are forcing their small and midsized counterparts to follow suit to secure the necessary labor even though their earnings are not rising as quickly.

     A survey conducted by one labor organization shows that 47% of member companies are raising wages this year. The figure represents a threefold jump from the previous year, according to the Japanese Association of Metal, Machinery, and Manufacturing Workers, which released the survey results on Wednesday.

     The pay uptrend is generally regarded as a sign of improved corporate earnings due to economic recovery. But the reality is that avoiding the threat of an acute labor shortage is the primary motivation behind the wage hikes.

     This situation is clearest in the auto industry, which has benefited greatly from the yen's weakening since late 2012. The positive effects of the weaker yen that boosted the bottom lines of Japan's leading automakers are slowly trickling down to their smaller suppliers.

Losing optimism    

Shigeru, a Gunma Prefecture-based supplier of seats and other car parts for Subaru cars, made by Fuji Heavy Industries, has decided to raise its basic monthly wage for employees by 800 yen ($7.82), the first such pay hike in 12 years. The move was prompted by its booming sales to Fuji Heavy. The small supplier aims to boost employee morale with pay rises while it enjoys strong earnings, according to the company.

     The trend is also visible in Hiroshima Prefecture, home to Mazda Motor. Hirotani, a Mazda interior parts supplier based in the city of Higashi-Hiroshima, and Nanjo Sobi Kogyo, a Hiroshima-based supplier of car interior products, have also raised basic pay rates.

     The wave of rising labor costs is now spreading nationwide. According to the survey by JAM, which has many small and midsized members, pay increases were made by 521 of the 1,102 companies whose labor unions responded to the survey by May 15. At a Wednesday press conference, JAM head Yukio Manaka expressed some satisfaction over wage negotiations held this spring. "Labor and management have cooperated to help end deflation and fulfilled their responsibility to some extent," he said.

     But the actual conditions at many Japanese small companies offer little reason for optimism on the wage front.

Labor concerns

Tohoku Steel, a Miyagi Prefecture-based specialty steel manufacturer, has also raised its monthly base pay, for the first time in six years, but a raise of  just 1,000 yen. This was less than a third of the 3,500 yen demanded by the union. The company has been pressured into the move by the government campaign that encourages wage increases as a means to stimulate economic growth and the responses to the campaign by market competitors.

     Another key factor driving the trend toward higher wages is an increasingly serious labor crunch.

     Nimbari Kosakusho, a Higashi Osaka-based company specializing in sheet metal processing, made a uniform hike of 500 yen in its monthly base pay for all employees in May because of concerns about employment prospects.

     Growing concerns over a possible labor shortage, especially among smaller businesses, were reflected in the employment conditions indexes in the Bank of Japan's March Tankan, its quarterly business sentiment survey.

     The index, which subtracts the percentage of companies reporting "insufficient employment" from those feeling "excessive employment," for small companies was -15, compared with -6 for large companies.

     Many small companies are being forced to increase pay to secure necessary workforces. 

     But not all companies can afford to attract staff by increasing wages. While major electronics companies have started seeing earnings improvements, "domestic suppliers have yet to feel the effects," said the president of a resin parts maker in Tokyo. "We don't have the wherewithal to increase labor costs."

     Even suppliers for Toyota Motor, which posted a record profit for fiscal 2013, are not all ready to offer pay hikes. A spring supplier in Aichi Prefecture, where Toyota is based, has decided against a base pay increase this year although the auto giant has boosted its base monthly salaries by 2,700 yen. Small suppliers are heavily dependent on the domestic market and struggling to follow the upward trend. "Our outlook remains murky," said a senior executive at the spring maker.

     Many small and midsized companies are raising wages as a sort of "preemptive investment to secure manpower," said Nobuo Tomoda, executive director at Tokyo Shoko Research, a credit research firm. Such moves could "undermine their financing conditions unless they can earn sufficient profits," warned Tomoda.

     In fact, a growing number of companies are going under due to a worker shortage and rising labor costs, according to Tomoda.

     During the first four months of this year, eight companies went bankrupt due to cash-flow problems caused by rising labor costs, compared with nine for the whole of 2013. An upward trend in wages that creates a virtuous cycle of economic growth driven by consumer spending is certainly important for preventing economic downturn after the April rise in consumption tax.

     But smaller businesses risk damaging their financial health if they stretch finances too far in order to keep up with their larger counterparts. This would be detrimental to the entire Japanese economy, which is supported to a great extent by small and midsize companies. 



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