Under pressure to raise wages, Japan’s smaller firms get creative

Rather than raising base salaries, which can be costly enough to strain a company’s finances to the point of bankruptcy, small and medium-sized enterprises are looking at boosting benefits.

“It’s not easy to immediately catch up with the amounts [of pay raises made by large companies] so we need to compete by adding as many options as we can to our benefit system," said Kei Higuchi, a human resources manager at Dynamic Map Platform, which employs 225 workers.

Smaller companies employ roughly 70% of Japan’s workforce, significantly influencing the economy. The central bank governor has highlighted the key role small businesses play in the so-called virtuous cycle—of higher wages, increased spending and sustainable inflation—that it is trying to engineer.

“Corporate profits have been at high levels, particularly for large firms. To sustain the virtuous cycle, it is essential that these profits be fairly distributed to small and medium-sized firms and eventually to households," Bank of Japan Gov. Kazuo Ueda said in December.

The wage gap between Japan’s larger and smaller companies has been shrinking but is still evident. Companies with fewer than 300 union members pledged a 4.92% pay increase this year, compared with the overall raise of 5.40%, according to the Japanese Trade Union Confederation.

Those that can’t keep up with wage increases have been padding up benefits that can help workers deal with rising cost-of-living pressures. For almost three years, Japan’s consumer inflation has been running above 2%, curbing appetite for spending as wage growth lags behind price rises.

Dynamic Map Platform, a Tokyo-based provider of three-dimensional map data, began subsidizing employee lunches in April 2023 to help offset the cost of eating out after moving its office to a fancier part of the city, Higuchi said. The company provides up to 3,500 yen, or about $23, in lunch vouchers to its workers every month.

Employee benefits are “a relatively reasonable strategy to respond to rising prices," said Yusuke Aoki, an economist at job-search platform Indeed. “It is difficult for companies to be competitive on wages, but employee benefits can be a point of differentiation, depending on what they offer."

But the risk of boosting benefits in lieu of wages is that workers will get the impression that their pay may never be raised, Aoki said, which could prompt them to switch jobs.

To survive in the short term, smaller companies will likely try to match large ones but that isn’t sustainable.

“Once they raise base salaries, it would be difficult to lower them," said Junko Takagi, a senior marketing manager at Edenred Japan, an operator of lunch benefit cards. Companies can use benefit programs to make up for gaps in monetary compensation, she added.

Raising base salaries is costlier as it means companies have to pay more for social security and overtime, but not lifting wages could cost them workers and complicate hiring.

“They may grit their teeth and push themselves in 2025," said Ko Nakayama, an economist at Okasan Securities and former BOJ official. However, “it may be difficult for companies to keep forcing themselves year after year, and it is highly likely that by 2026 there will be a number of companies that will be unable to keep up with such wage hikes."

Bankruptcies among small firms caused by rising personnel costs doubled in fiscal 2024, according to a survey by Tokyo Shoko Research, with bankruptcies related to labor shortages at a record high.

Dynamic Map Platform plans to continue offering a combination of meal subsidies and bonuses four times a year, instead of two previously, in addition to raises based on seniority, Higuchi said.

“We are now in an age where small- and medium-sized companies need to come up with various ideas," he said.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com