Japan workers pressed to accept pay cuts

By Teruaki Ueno

TOKYO (Reuters): Japan is gearing up for its annual shunto spring labor negotiations with employers seeking the first wage cuts in decades in exchange for promises of job security.

With the traditional lifetime employment system starting to crumble and the economy still in the doldrums after a prolonged recession, the focus of this year's wage talks is whether workers will be able to win bigger paychecks -- and keep their jobs.

Under a system introduced more than 40 years ago, management and labor representatives hold collective shunto wage talks from mid-February until March to seek unified wage hikes.

Japanese employers, under intense pressure to improve profitability and competitiveness in a tough global marketplace, say they must move ahead with drastic reforms and cut costs.

In a report released last month, the powerful Japan Federation of Employers' Associations argued that wages paid by Japanese companies were the highest in the world and hefty labor costs were impeding corporate growth.

"It's impossible to keep both employment and higher wages at the same time under the current economic circumstances," said Hiroshi Okuda, head of the federation.

"If employers were to set aside more costs for each employee, many of them would have no option but to cut the number of workers, even against their will," he said.

Many analysts believe that Japanese managers are so concerned about corporate image that they will shy away from taking drastic measures to cut a large number of jobs, thus possibly putting an end to the lifetime employment system.

"Japanese companies will go through a gradual process of restructuring over the next several years," said Kazutaka Kirishima, chief economist at the Research Institute of Sumitomo Life Insurance. "They can't resort to drastic means at once."

The Japanese Trade Union Confederation (Rengo), which represents eight million workers from across most industries, is aiming for an average pay raise of three percent for the year starting on April 1.

Last year, the average increase was a record low 2.21 percent, and economists say it will probably go even lower to two percent this year.

Rengo says employers should improve their business strategies and streamline costs without laying off employees.

Union leaders insist higher wage increases are vital to boosting the flagging Japanese economy, by stimulating consumer spending and domestic demand.

"To boost spending, we must win a pledge from the employers to increase wages," said Rengo chief Etsuya Washio.

Nikkeiren's Okuda argued there was no direct link between wages and consumer spending, a driving force in Japan's economy.

Some economists disagree.

"If wages drop and job insecurity remains high, consumer spending will never increase," Kirishima said. That could hamper Japan's tentative move towards economic recovery after its worst recession since World War II.

Kirishima said a small wage hike could in fact hurt growth by putting a new damper on spending among people who for the first time in decades face the threat of job losses.

"It would have a significant psychological impact on the economy," he said.

Japan's unemployment rate in December climbed 0.1 percentage point from November to 4.6 percent, or 2.88 million workers. This halted a steady improvement in employment conditions since the rate peaked at a record high of 4.9 percent in June and July.

Rengo's Washio accused employers of trying to scrap the traditional practice of paying workers according to a seniority- based formula rather than by performance.

"There is a seniority-based wage system even among professional baseball players," he said. "It is difficult to create clear standards to assess job performance objectively."

In a rare and bold move to break with the tradition, electronics maker Toshiba Corp said this week it would introduce a merit-based wage scale from April.

This year's spring labor offensive is expected to reach a climax on March 15 and 24, when most major unions are expected to receive replies from management on their wage demands.