Although significant wage growth continues in Japan, inflation-adjusted real wages have yet to exhibit an upward trend. Under these circumstances, the government has set “the widespread and sustained implementation of wage increases that exceed price hikes” as a pillar of its economic policy, aiming for a 1% increase in real wages. In general, real wages should be increased through productivity improvements. However, Japan’s real wage growth is significantly lower than overall labor productivity growth for the economy. In other words, changes in real wages are diverging from changes in productivity.
However, firm-level data indicate a robust relationship between productivity and wages. Wages are higher at firms with higher productivity and wage growth is higher at firms with higher productivity growth. The difference between macroeconomic trends and micro-level data is attributable to factors that reduce the effect of productivity growth and push down real wages. Specifically, these factors include (1) deterioration in the terms of trade, (2) a decline in the labor share, and (3) changes in the wage structure.
The first factor is the deterioration in the terms of trade, where the prices of goods and services exported by Japan have continued to decline relative to those of its imports. The deterioration in the terms of trade is inextricably linked to the depreciation of the yen’s real exchange rate, and implies an outflow of real income overseas. This is a major reason why real wage growth has not kept pace with overall productivity growth for the economy. Several researchers have pointed this out and it is nearly a consensus view.
The second factor is the decline in the labor share of income as a percentage of gross domestic product, which has attracted global attention. Changes behind the decrease include the spread of labor-saving technologies, such as information technology and robotics, the intensification of Japan’s competition with lower-wage countries through globalization, the growing monopsony power of large firms in labor markets, and a decline in the bargaining power of labor unions. In the future, artificial intelligence as well may affect the labor share. However, movements in the labor share differ depending on definitions and measurement methods, and in Japan, they have little or no effect on employees’ wages.
The third factor is changes in the wage structure. If large firms, which account for a large share of value-added, have relatively low wage increase rates, the overall wage growth rate for the economy will be lower than the average rate for all firms, contributing to lower macroeconomic real wage growth. Behind this is the narrowing of wage gaps between small and large firms. As pointed out in Japan’s Annual Economic and Fiscal White Paper, the wage growth rate for small and medium-sized firms has been higher than that for large firms over the past two decades.
Factors behind the higher wage growth rate for small and medium-sized firms may include a high need for wage increases due to labor shortages and increases in the minimum wage, as well as extended tenure of employees. Factors behind the lower wage growth rate for large firms may include changes in the gender and age composition of employees, such as an increase in the number of female and elderly employees, the flattening of the seniority-based wage curves, and the growing emphasis on non-wage working conditions, such as flexible working styles and job security.
It is uncertain whether changes in the terms of trade and wage structure will continue to suppress real wage growth in the future. What can be done to achieve sustained real wage growth is to promote innovation and the improvement of workers’ skills to achieve productivity growth that outweighs downward pressures.
>> Original text in Japanese
* Translated by RIETI.
October 23, 2025 - Published in Nihon Keizai Shimbun's "Economist 360° Perspective"
