Small steps, Japanese salaries are moving towards a merit system

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YOSHIKAZU TSUNO | AFP | Getty Images

Seniority and lifetime employment are synonymous with the Japanese employment system, but Hitachi could change that.

The consumer electronics giant could implement a merit pay system for managers next April, according to local broadcaster NHK, which economists say could trigger long-awaited structural changes in the Japanese job market. .

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Hitachi’s move is a major one and responds directly to Prime Minister Shinzo Abe’s call for companies to raise wages above the government’s 2% inflation target, said Junko Nishioka, chief economist at the Japan at RBS Securities Japan.

By implementing a merit pay system, companies will prove they are ready to embrace the kind of reform Abe called for, RBS’s Nishioka said. The prime minister urged companies to revamp their corporate culture by hiring more women and foreigners, which could be the next step for companies, she said.

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Wages in the world’s third-largest economy are based on a seniority system where wages typically increase with the number of years of service employees have. Shushin-koyo, or “job for life”, has been common since the 1920s, but calls for change have grown louder with the rapidly aging population and shrinking workforce.

A helping hand for Abenomics

Hitachi first announced its intention to abolish seniority-based pay increases in 2003, but did not follow through. Change is more likely under Abe’s current administration, as higher wages are integral to his efforts to beat deflation and increase spending.

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Data suggests its efforts are paying off: regular pay rose 0.7% in July from a year earlier, the second consecutive month of increases; June saw the first increase in more than two years.

While employees will welcome performance-based pay, it won’t be enough to revitalize corporate governance in the drastic way Abe hopes, said Takuji Okubo, senior economist at Japan Macro Advisors.

“There needs to be more incentives for managers to care about the share price and interest in stocks rather than just increasing their power or their salaries,” Okubo said.

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However, the majority opinion is positive. If Hitachi – the embodiment of Japan Inc – goes all the way, others may follow suit. Japan Post said it will introduce performance pay this year, while Sony is expected to implement the system next year.

“Increasing competitiveness is one of the slogans of Abenomics, so I imagine other companies will introduce the new merit system as well,” Kohei Iwahara, economist at Natixis Japan Securities, told CNBC.


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