Japan’s biggest companies agreed to raise wages by 5.28% for 2024, the heftiest pay hikes in 33 years, the country’s largest union group said on Friday, reinforcing views that the county’s central bank will soon shift away from a decade-long stimulus programme.

The much-stronger-than-expected increase comes as the Bank of Japan looks close to ending eight years of negative interest rate policy. BOJ officials have stressed the timing of a pivot would depend on the outcome of this year’s annual wage negotiations.

Policymakers hope that big pay rises will boost household spending and produce more durable growth in the broader economy, which narrowly avoided slipping into recession late last year.

Workers at major firms had asked for annual increases of 5.85%, topping the 5% mark for the first time in 30 years, according to trade union group Rengo.

“We estimate that this year’s wage hikes could reach 5.3%. If that is realised, real wages would turn positive in April-June 2024,” said Moe Nakahama, an economist at Itochu Economic Research Institute.

Rengo, which represents about 7 million workers, many at large companies, had set its eyes on hikes of more than 3% in base pay — a key barometer of wage strength as it provides the basis for bonuses, severance and pensions.

Analysts had expected a rise of more than 4%, after last year’s 3.6%, itself a three-decade high.

Rengo chief Tomoko Yoshino told a press conference that rising income inequality, inflation and a labour crunch were among the factors behind the big increase, adding part-time workers would see pay hikes of 6% this fiscal year.

Yoshino said the country was at a critical stage in a shift towards economic revival.

The government is counting on such wage hikes to trickle down to smaller and medium-sized firms, which account for a whopping 99.7% of all enterprises and about 70% of the country’s workforce, but many lack the pricing power to pass higher costs on to their customers.

Wage talks for most smaller companies are expected to conclude by the end of March, and any increments are likely to come in lower than those agreed by major firms.

Among smaller delivery companies, for example, only 57% are planning any wage hikes in the fiscal year from April, according to a Japan Chamber of Commerce survey published last month.

Even though Japanese companies have been raising pay, the increases have largely failed to keep up with inflation. Real wages, which are adjusted for inflation, have now fallen for 22 straight months.

LABOUR SHORTAGES

At the labour negotiations, one strong showing emerged after another, led by Toyota Motor 7203, the bellwether of annual talks, which unveiled its biggest pay increase in 25 years.

The bumper wage hikes are likely to boost expectations the central bank will end negative interest rates as early as its next policy setting meeting on March 18-19.

Japanese businesses are facing a chronic labour shortage due to an ageing and dwindling pool of workers.

Prime Minister Fumio Kishida is pushing companies to raise wages to help Japan shake off years of deflation and put an end to meagre wage growth that has kept well behind the average for the OECD grouping of rich countries.

The annual pay negotiations – called “shunto” or “spring labour offensive” – are one of the defining features of Japanese business, where relations between labour and management tend to be more collaborative than in some other countries.

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