Small Firms' Wage Burden Complicates BOJ's Rate Hike Plans

In Tokyo, Japan, small firms are allocating a significantly higher portion of their profits towards wages compared to larger counterparts, raising doubts about their ability to sustain pay hikes. This development casts uncertainty over the Bank of Japan's (BOJ) ability to raise interest rates, a move dependent on broader wage growth to sustain a consumption-led recovery.

The BOJ's next steps hinge on whether smaller firms, which employ 70% of Japan's workforce, can continue meeting wage demands. Policymakers are closely monitoring this situation, given that small and midsized enterprises (SMEs) already spend around 70% of their profits on wage costs, much higher than about 40% for big firms.

Despite recent wage hikes driven by rising raw material costs, there's uncertainty about the sustainability of these increases, especially for SMEs lacking the global reach and competitive advantage of larger firms. This scenario could prompt the BOJ to hold off raising interest rates at its upcoming meeting.

The uneven corporate pay burden and questions over sustainable wage growth, coupled with external threats such as potential U.S. tariffs, further cloud the BOJ's rate hike plans. The central bank is likely to keep rates steady at its December 18-19 meeting, preferring to scrutinize next year's wage outlook more closely.