Japan is known for having relatively low salaries compared to other developed countries. There are several factors that contribute to this phenomenon.
After World War II, Japan focused on rebuilding its economy through exporting manufactured goods. To be competitive globally, Japanese companies had to keep costs and therefore salaries low. This export-driven economic model led to rapid growth from the 1950s through the 1980s. However, it also set the stage for stagnant wages that have persisted to today.
Japanese culture emphasizes collective harmony and loyalty to one’s company. Workers are expected to dedicate themselves and make personal sacrifices for the good of the group. This mentality translates to a willingness to accept lower compensation in exchange for job security and social stability.
Additionally, concepts like “lifetime employment” and seniority-based pay scales reinforce longevity over high pay at any given moment. Younger employees especially put up with relatively low salaries with the hope that their loyalty will be rewarded later in their careers.
Weak Labor Protections
Compared to other developed nations, Japan has less stringent labor regulations. The power dynamic favors employers, who face fewer requirements around minimum wage, overtime pay, and collective bargaining rights. With weaker structural protections, Japanese workers have less leverage to demand higher salaries.
Unlike countries that actively recruit foreign talent, Japan has traditionally been closed off to immigration. This constricts the labor supply and gives companies less incentive to compete for workers by raising wages. The insulation from global labor markets contributes to lower average salaries compared to places with more open immigration policies.
Structural Factors That Suppress Wages
Beyond the historical and cultural context, there are structural economic forces that depress salaries in Japan relative to productivity.
Japan has struggled with deflation, or falling prices, for decades. When the cost of living and prices for goods & services decline over time, it creates pressure to keep wages low as well. Employers are hesitant to increase salaries when their revenues and profits are squeezed by deflation. This puts downward pressure on overall compensation across the economy.
Recession and “Lost Decades”
In the 1990s, Japan experienced an asset price bubble collapse that led to a prolonged recession and economic stagnation. Growth has remained sluggish over the “lost decades” ever since. Weak macroeconomic conditions over this period gave companies reason to suppress wage increases in an effort to protect profits and stay competitive.
To combat deflation and spur economic activity, the Bank of Japan has kept interest rates extremely low while expanding the money supply through quantitative easing. This monetary policy pushes down wages in two ways:
1. Low interest rates reduce the return on savings. This gives households less income from financial assets, putting downward pressure on consumer spending power.
2. Expanding the money supply without corresponding GDP growth effectively devalues the currency. A weaker yen makes imported goods more expensive, suppressing real wages.
Japan’s aging demographics are shrinking the working-age population available to generate economic growth. With a tighter labor pool, companies face less pressure to raise wages to attract talent. The result is reduced leverage for workers to negotiate higher salaries.
In addition to broad economic dynamics, there are industry-specific factors that contribute to modest salaries in Japan relative to other developed economies.
Japan built its post-war success through manufacturing exports. However, competition from developing countries has eroded Japan’s advantage in lower-cost production. To stay competitive globally, manufacturing wages have remained tightly controlled.
|Average Annual Manufacturing Wages
Like manufacturing, retail and service industries face global competition and pressure to minimize costs. Japan’s retail sector is also contending with sluggish domestic consumption. Service jobs already tend to pay less than manufacturing; in Japan, salaries in these sectors are particularly restrained.
While known for advanced technologies, Japan significantly lags the U.S. in compensation for R&D roles and technology professionals:
|Average Annual Tech Industry Wages
Stricter immigration policies make it difficult for Japanese tech firms to attract global talent, contributing to lower salaries compared to American peers.
While historical and structural factors have kept wages low in Japan, there are some shifts underway.
Modest Wage Growth
The tight labor market has finally begun driving modest growth in wages. After decades of stagnation, average annual earnings rose about 2% in both 2019 and 2020. However, pay is still not keeping pace with productivity, and income inequality persists.
The government has set goals to achieve 3% average wage growth in hopes of stimulating consumer spending and economic growth. Policies aim to reform corporate governance, encourage performance-based pay, and reduce excessive overtime. But changes have so far been gradual.
Increasing Foreign Workers
Facing acute labor shortages, Japan is slowly opening up to foreign workers. Special visa programs are bringing in more overseas talent for technical skills and manual labor jobs. This may gradually help tighten the labor pool and give workers more leverage to negotiate higher pay.
Beyond broad economic factors, the gender pay gap in Japan contributes to overall lower salaries compared to other advanced economies.
Japanese women earn only 74% as much as their male counterparts on average. The gap is larger than in the U.S., U.K., and Europe. Societal norms pressure women to take lower-paying jobs and sacrifice career advancement for family roles.
Few Women in Leadership
Just 5% of managerial positions in Japan are held by women. Lack of female representation in senior roles perpetuates the cycle of gender inequality.
Many women leave the workforce after having children. Those who return often take part-time or lower-paying jobs that offer flexibility at the cost of career progression.
Addressing the barriers women face in skill development, hiring, promotion, and balancing family obligations would help raise Japan’s overall salary averages.
Outlook for the Future
While historical precedent and structural economic challenges make it difficult to overcome Japan’s legacy of low salaries, conditions are emerging to apply upward pressure on wages:
Opportunity in Tech
As Japan faces a shrinking labor force, productivity improvements through automation and technology adoption become even more crucial. This trend may allow higher salaries in tech and IT jobs that drive innovation.
Emphasis on Human Capital
Economic growth depends more on human capital as Japan’s population ages. Businesses may allocate more resources toward wages, benefits, training, and career development to attract and retain talented workers.
New Corporate Culture
Younger generations in Japan show greater willingness to switch jobs for higher pay and better work-life balance. Turnover costs could motivate companies to compete harder on compensation.
While lowering the gender pay gap, relaxing immigration restrictions, and updating traditional employment models present challenges, these shifts can help lift average wages over the long run. But Japan likely faces difficulty matching salaries in economies with faster innovation, flexible labor markets, stronger consumer spending, and more openness to global talent.
In summary, Japan’s low salaries relative to other developed nations stem from a mix of cultural norms, economic dynamics, demographics, and industry-specific factors. Movement toward performance-based pay, focus on productivity, and increased labor mobility provide some tailwinds. However, ingrained corporate traditions and tight immigration policies present obstacles to closing Japan’s wage gap with economies that attract global talent and drive innovation through entrepreneurship. While modest improvements are underway, structural challenges suggest Japan will continue struggling to raise salaries despite government goals and tight labor market conditions.