Major Japanese companies, including Toyota Motor Corp. and Nissan Motor Co., on Wednesday offered their largest pay hikes in decades at annual wage negotiations that could determine whether the country can finally overcome its chronic deflation.

The development will likely pave the way for the Bank of Japan to scale back its unprecedented monetary easing. The central bank has said its policy decisions will largely depend on the outcomes of the negotiations.

Prime Minister Fumio Kishida's government has repeatedly asked business leaders to increase wages at a pace that exceeds inflation. Rising prices for everyday goods due to higher raw material costs and the weak yen have weighed on households.

Toyota, seen as a trendsetter at the annual "shunto" wage negotiations, said it had fully met the request of its labor union, which had demanded its largest pay hike since 1999. The monthly pay will be raised by up to 28,440 yen ($193), it said.

An official writes down responses from major Japanese companies in annual wage negotiations on a board in Tokyo on March 13, 2024. (Kyodo)

Nissan agreed to increase monthly wages by 18,000 yen on average, the biggest rise for the company since 2005, when its current wage system was introduced. Nippon Steel Corp. said it will hike base pay by 35,000 yen per month, exceeding its labor union's request by 5,000 yen.

These moves come after several companies have already committed to substantial pay raises. Honda Motor Co. is offering its largest monthly pay raise since 1989, amounting to 21,500 yen, while Japan Airlines Co. agreed to 12,000 yen, its most significant base pay increase in 33 years.

Kishida hailed the outcomes at a government meeting with representatives from the business community and labor unions, saying, "There is a momentum with powerful wage hikes that is stronger than last year. We will do everything we can to keep this trend going."

BOJ Governor Kazuo Ueda said at a parliamentary committee meeting that "developments in the shunto negotiations will be a major point" for the central bank to discuss future monetary policy.

The BOJ is scheduled to hold a two-day policy meeting through Tuesday, with market participants increasingly expecting the bank to signal its inclination towards reducing stimulus measures, such as ending negative interest rates.

"The degree of pay increases was bigger than I expected," said Koichi Fujishiro, senior economist at the Dai-ichi Life Research Institute. "I believe the BOJ has become more confident about ending the negative rate policy."

The upbeat results come at a time when many Japanese companies expect record-high profits for the current fiscal year ending this month, with exporters benefiting from the falling yen, which bloats their overseas earnings when repatriated. The economic recovery from the coronavirus pandemic has also provided a tailwind for businesses.

The combined net profit of about 1,400 firms listed on the Tokyo bourse for fiscal 2023 is expected to rise about 13 percent from the previous year to over 47 trillion yen, hitting a record for the third straight year, according to SMBC Nikko Securities.

The robust earnings, coupled with the bourse's introduction of measures to encourage firms to increase shareholder returns, helped lift the Nikkei stock index to an all-time high in February, breaking the previous record set more than 30 years ago during the country's asset price bubble era.

Given the upward trend, labor unions have grown more confident in their demands.

According to a preliminary tally by the Japanese Trade Union Confederation, also known as Rengo, its member organizations demanded an average pay increase of 5.85 percent as of March 4, the first time it has surpassed the 5 percent mark since 1994.

Through significant wage hikes, Japanese firms are also aiming to secure talent and address chronic labor shortages in a country where the population is aging as economic activity returns to normal after the pandemic.

On Wednesday, Toyota said it would raise the starting salary for new employees across all its job categories. The world's biggest automaker, which currently offers 228,000 yen per month for each new university graduate, will decide how much to increase it later.

With the momentum for wage increases growing, the focus is now on whether the positive effect will trickle down to small and medium-sized firms, which employ about 70 percent of the country's laborers.

In recent years, the Japanese government has intensified its efforts to shield smaller firms from the pressure exerted by larger companies to unreasonably lower prices, enabling these firms to earn enough to raise wages.

Japan's antitrust watchdog earlier this month warned Nissan about illegally reducing payments to 36 subcontractors. Nissan President Makoto Uchida apologized on Wednesday for the scandal and said the company will "respond sincerely" to suppliers intending to pass increased costs on to the automaker.

The government has decided to disclose a list of problematic companies, such as those that prevent their business partners from raising prices, by the end of this month as part of efforts to support wage increases at smaller firms," Kishida announced on Wednesday.

The annual wage talks began around mid-February and are expected to conclude at most large companies by mid-March. The outcomes typically influence negotiations at smaller firms.

Related coverage:

Japan real wages fall in January for 22nd month, down 0.6% on year

BOJ chief Ueda says 2% inflation target still not in sight

Japan annual wage talks begin as pay hikes demanded to beat inflation