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Japan's Defence Budget and Uniqlo Wage Rise

Updated: Feb 16, 2023

The following information was used for an interview on the BBC World Service World Business Report on the 11th January 2023.

The current visit of Japan’s Prime Minister Kishida to Europe and North America has highlighted Japan’s need to justify the cost of the impending defence build-up with his party and voters back home and to also offset concerns that the Japanese monetary policy is too loose, especially given the recent sell off of the Yen. Plans to raise money to fund this increase in defence spending through tax hikes have met fierce opposition from within his own party and indeed are unpopular with voters, even though the extra spending on defence is more widely supported. An ageing population and a burgeoning public debt were already putting pressure on the Japanese economy before rising energy prices and rising inflation combined with the negative impact of Covid on consumer spending added to this pressure. Kishida may be justified in staying supportive of keeping a loose monetary policy and pushing some of the burdens onto cash-hoarding companies to and raise wages alongside rising prices.

The news today that Uniqlo has increased domestic wages by up to 40% may also be a sign that his plan is working. This huge increase is very unusual in a country where wages have remained fairly stagnant due to various Japan specific reasons. Japan has one of the lowest minimum wages in the OECD and real hourly compensation has grown as a much slower rate than most other developed countries.

Reasons for wage stagnation

One of the most often cited reasons is that Japanese corporations are hoarding ‘retained earnings’ Since the bubble burst, Japanese companies have tended to hoard cash in their typical risk-averse way of securing long-term financial security to cushion them against times of crisis. If they do spend it, they prefer investment into R&D rather than wage rises. This ‘cash hoarding’ mentality has come under fire as a corporate governance failure and corporate governance reforms in Japan have included a push for companies to invest their profits to get a quicker ROI and create more shareholder value. This will in turn attract more investment into Japanese companies from foreign investors.

The emergence of a dual labour force with non-regular workers paid substantially less than full time workers and the decline of bargaining power of employees has also pushed wages downwards in Japan.

Why do wages need to rise?

The role of Japanese consumers plays a part-this wage stagnancy has led to a deflationary mindset resulting in consumers who, without higher wages, do not want to pay higher prices and who are extremely price sensitive. Basically, they do not want to pay high prices or a higher consumption tax (when Abe raised this, Japan went into a mini recession). Japanese companies, aware of this mentality, have tried not to pass on price increases to consumers and more recently, have cut prices to stoke demand.

However due to recent events and inflation led not by consumer demand but from the rising costs in energy, Japanese companies have had to pass on costs to consumers. This has been a huge shock to Japanese consumers and Japan risks losing the economic hit of higher consumption and the ability to raise money through consumption tax hikes if wages do not go up. Hence why Kishida has been so keen to put pressures on Japanese companies with profit to put these into wage rises.

Will it work?

This is probably an easier sell in Japan as Japanese businesses tend to align with Gvt led requests in a much closer way than perhaps we would see in other economies, especially when it is sold as part of a social contract, especially as they built up their economy in a developmental state when corporations and the state worked together for the common good. In Japan's network-based business environment, Uniqlo may also lead the way and influence other companies to do the same. In a country with a declining labour force and tight labour market, a wage hike makes business sense too in order to attract and retain the best staff. However, Uniqlo can certainly afford to do this given the phenomenal profits made by their Global Business Unit in 2022-can other Japanese companies realistically follow suit?

However, even if they do, there are still many areas that will impact upon the growth of the Japanese economy regardless of monetary policy including poor corporate governance issues, gender inequality, low corporate productivity and a growing non-regular labour market. There are also questions around the expectations made on Japanese employees who will receive such wage raises, who already work some of the longest hours in the world and whose contracts can tie them into unlimited overtime if there are special company circumstances. Will this come with expectations of longer hours?

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