Japanese Prime Minister, Fumio Kishida, announced to ensure workers' wage hikes through tax breaks for employers, aiming to protect the economy from the impact of rising global inflation.

Under the current system, large companies can deduct up to 20 per cent of employee wages from their corporate taxes and smaller businesses are given a deduction of up to 25 per cent if they meet a set of conditions, including a certain degree of wage increase.

Tax reduction for companies that raise wages as one of the key policy measures of the government and the biggest focus of the forthcoming tax system reform.

“When we urge private-sector firms to raise pay, we must create a virtuous cycle of wage hikes and corporate growth to enable sustainable wage hikes”, he said.

He also promised that loss-making small firms that raise wages will receive special subsidies.

He is asking employers to raise wages by 3% or more, while Japan’s largest labour union is calling for a 4 per cent pay rise for its members in annual wage negotiations set for early next year.

The Japan Business Federation, Keidanren, last year, at the height of the COVID-19 pandemic, already defined unrealistic that target, especially considering that the negative impact on corporate earnings varied among companies and industries.

However, Keidanren Chairman, Masakazu Tokura, said that “the federation will encourage companies that have recovered their earnings to raise wages, as it has always done in the past, calling on companies that are performing well to return an appropriate share of profits to the workers, who are important stakeholders. In that sense, the Kishida administration's plan to give tax incentives to companies that raise wages is very much appreciated by the federation”, that asks for an uncomplicated and user-friendly system.

Wage negotiations will end in March, when major companies have to decide how to respond to requests from their labour unions.

It is interesting to underline that, as reported in the Japan Times on 5 December 2021, a survey conducted in November by a credit research company, Teikoku Databank Ltd, shows that nearly half of Japanese firms (the 48.6%, of the respondent companies) will raise wages even without further tax incentives for company pay hikes that the government is planning to introduce next fiscal year. Only the 8.1 per cent replied that they were unable to increase wages regardless of the scale of tax breaks.

This demonstrates that employers have realised the importance of attracting and retaining workers amidst the country's long-standing labour shortage and rapidly ageing population, and that they are willing to pay higher wages to achieve this, even in a context of continuing economic uncertainty.