Why Aren’t Wages Rising in Japan?

 

Why Aren’t Wages Rising in Japan?

— How the Labor Share Ratio and Retained Earnings Are Stalling Economic Growth


Chapter 1: The Illusion of Wage Growth

Despite government announcements of a “historic wage increase,” most workers in Japan feel no real difference in their paychecks. The reality is that real wages have barely moved in 25 years, even though labor productivity has risen by roughly 30% during the same period.

This growth rate exceeds that of major European economies like France and Germany. The popular narrative — “wages haven’t increased because productivity is low” — is no longer credible.

The real question is this: Why are companies making more money, yet not paying workers more?

Chapter 2: Record Corporate Profits, Yet No Pay Raises

The most glaring figure is Japan’s retained earnings, also known as corporate savings or internal reserves.

  • In 1998: approximately ¥120 trillion

  • In 2023: exceeded ¥600 trillion

During this same period, wages remained flat, and labor investment stayed minimal. This clearly indicates that companies are not reinvesting their profits into people — they are simply hoarding them.

The Three Uses of Corporate Profit:

  1. Labor distribution (wages, benefits)
    → Boosts household consumption and worker motivation

  2. Capital investment (equipment, R&D)
    → Drives future growth and competitiveness

  3. Retained earnings (cash accumulation)
    → Money remains idle, no circulation in the economy

Japan’s major corporations overwhelmingly choose option ③ — the least socially beneficial.

Chapter 3: The Collapse of the Labor Share Ratio

The labor share ratio measures how much of a company’s added value is returned to workers. In healthy economies, this figure sits between 60–70%.

Japan’s leading corporations often fall below 50%, making it one of the lowest among advanced nations.

Consequences of a declining labor share ratio include:

  • Wage stagnation

  • Weak domestic consumption

  • Widening income inequality

  • Declining birthrates

  • Erosion of the middle class

In short, companies are profiting without contributing to the well-being of their workforce or society.

Chapter 4: Why Do Companies Hoard Profits?

Several structural reasons explain this behavior:

■ Risk Aversion by Corporate Leaders

  • After the bubble burst and the 2008 financial crisis, Japanese CEOs embraced defensive management.

  • Internal savings are seen as “security,” while labor and investment are treated as “risks.”

■ Governance Dysfunction

  • Japanese executives face little accountability.

  • Shareholder and worker pressure is weak compared to Western governance standards.

■ Profit Distribution Skewed to the Top

  • Executive pay and shareholder returns are prioritized.

  • Workers receive what's left — often very little.

Chapter 5: Why Doesn’t the Government Intervene?

In a healthy democracy, the government should correct corporate imbalance. But in Japan, it doesn’t — and here’s why:

■ Political-Corporate Collusion

  • The ruling Liberal Democratic Party (LDP) relies heavily on campaign donations from large corporations.

  • Policy decisions reflect corporate interests, especially those of Keidanren (Japan Business Federation).

■ Media Complicity

  • Major media outlets are dependent on advertising revenue from the very corporations they should scrutinize.

  • As a result, discussions on labor share or corporate hoarding rarely make headlines.

■ Voter Inaction

  • For decades, voters have continued electing parties that prioritize business interests over labor reform.

  • The public’s demand for economic justice remains muted.

Chapter 6: Is Retained Earnings Taxation Really “Unfair”?

Opponents claim taxing retained earnings is “double taxation.” But is that true?

In France, a model already exists — companies holding excess reserves face additional taxation unless they reinvest those funds. This system incentivizes companies to put their money to work, rather than letting it sit idle.

A Viable Model for Japan:

  • Excess retained earnings above a set threshold are subject to a surtax

  • Funds used for wage increases or investment are exempt

  • Unused reserves after a set period (e.g., 3 years) trigger taxation

This approach encourages economic circulation without harsh penalties.

Chapter 7: Policy Package to Boost Labor Share

The following set of reforms could meaningfully shift corporate behavior.

■ 1. Tax Incentives for Wage Increases

  • Lower corporate tax rates for companies that raise wages significantly.

■ 2. Mandated Minimum Labor Share Ratio

  • Require companies exceeding profit thresholds to allocate a minimum percentage to wages.

■ 3. Reform of Government Subsidies

  • Only offer subsidies to companies with proven wage growth or capital investment in the past three years.

■ 4. Strengthening Shareholder Engagement

  • Government-managed funds (like GPIF) should pressure corporations with excessive reserves to increase distributions or investment.

Chapter 8: Why “Distribution” is the Key to Growth

Distribution is not charity — it’s economics.

When workers earn more:

  • They spend more, boosting demand

  • Tax revenue increases, supporting public services

  • Social mobility improves, reducing inequality

  • Birthrates may recover, addressing demographic decline

In other words, distribution is the engine of sustainable economic growth. Without it, no amount of productivity or profit matters.

Chapter 9: Reform Requires Political Will

If companies won’t voluntarily change, and the current government won’t intervene, voters must act.

What to look for in political alternatives:

  • Policies aimed at raising the labor share

  • Concrete proposals to tax or condition retained earnings

  • Independence from Keidanren and big business lobbies

Without public pressure and electoral change, the status quo will persist.

Chapter 10: Conclusion — Japan Needs a Distribution Revolution

For 30 years, Japan has prioritized “growth strategies,” but the fruits of growth have not reached its citizens. What’s needed now is a shift to distribution-first economics.

So long as companies choose hoarding over sharing —
And so long as the government condones it —
Japan’s economic future remains trapped in stagnation.

We must build a society where:

  • It is no longer profitable to hoard

  • It is advantageous to invest in people and the future

This is not just about policy. It’s about what kind of society we want to live in — and whether we have the courage to vote for it.


Read in Japanese↓

「増えない給料」の真因と日本経済の停滞を生む構造（2025.2.26）

Read more articles (in Japanese)↓

昇進を拒む時代、企業の新たな役割とは（2025.2.25）


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