The 68-Year-Old Reason Why Toyota Won't Unlock Japan's Inflation

(Bloomberg) -- At a New Year's party, Japanese premier Shinzo Abe made a plea to business leaders: Raise wages by 3 percent to support Japan's economy. The request was met with a polite silence. “Let me take that as no objection,” the Prime Minister said.

Among those present was Toyota Motor Corp. President Akio Toyoda, the person with the most power to make Abe's wish come true, especially after the nation's biggest company forecast a record profit. But Toyoda fended off reporters' questions about wages after the Jan. 5 party, saying the company preferred the time-honored way of negotiations with its labor union.

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His answer goes to the heart of why years of massive monetary stimulus and the tightest labor market since the 1970s have failed to fix the country's anemic inflation. Without the prospect of higher pay, households will continue to choose saving over spending, retailers will hold down prices and companies will seek expansion abroad rather than at home.

Toyota's retained earnings have risen 53 percent in the past five years, but it's been cautious about pay raises, and its influence on wages in Japan is huge. In the spring negotiations now underway, the big manufacturers and their unions, led by the automaker, set the tone that ripples through the whole economy. 

‘Mighty Toyota'

“It's Mighty Toyota,” said Hiromu Kogure, general secretary of UA Zensen, a union representing 1.7 million workers in sectors covering services, textiles, chemicals and food. “They do everything in a theatrical style. That helps many business owners.” Kogure said his union, which is a key representative of women and part-timers, has tried and failed in the past to get businesses to agree to wages before Toyota announces its pay deal.

Unlike in global peers like Germany, where unions push hard for higher wages, in Japan the two sides are much less confrontational. While the big umbrella unions hold rallies each spring to show support for wage increases, it's the company unions that actually negotiate the pay.

“We can't complain to the company all the time,” said Koichi Watanabe, director of public affairs at the enterprise union that represents 68,000 Toyota workers. “We trust each other and share responsibility.”

To understand why the union seems so passive in its approach, you have to go back to Toyota's darkest hour, 68 years ago. Japan was in post-war austerity and businesses were failing as the economy contracted. Toyota founder Kiichiro Toyoda was forced to agree to a drastic restructuring with job cuts in exchange for bank loans.

The union resisted, holding a mass rally at its headquarters and a two-month dispute ensued, halting production and causing losses to mount at Toyota and the town's local businesses. In a bid to gather support for the company, a manager snuck round the houses of workers who would avoid the cuts, distributing documents, wearing rubber-soled socks to avoid detection by union members.

It was in vain. A tearful Toyoda announced the inevitable.

“We have to dissolve or let a group of people step off the Toyota ship,” Toyoda said, according to the company's history. “I'm very sorry.”

He and other executives resigned. After 30 collective bargaining sessions, some lasting all night, 2,146 workers were cut, a quarter of the workforce. Two years later, Kiichiro Toyoda died at the age of 57.

“We call it the Big Dispute,” said the union's Watanabe. “It all started from back then.”

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Toyota hasn't had a round of job cuts since in Japan. Managers and union leaders learned to cooperate, preserving jobs in bad times and building profits in good ones.

Today, Toyota employs more than 360,000 people. Since the global financial crisis, it hasn't cut pay and has awarded bigger raises than the national average, according to data from the union and the labor ministry. In 2017, the average monthly gain for employees at Toyota was 9,700 yen ($91). Nationwide, the increase was 6,570 yen.

Read more: Japan's labor squeeze and deflation dilemma

But most of those gains reflect standard increases companies give based on seniority, while entry level salaries remain low. As senior, highly paid staff retire and young workers join, the company can control costs. Only a fraction of the wage gains comes from increases in base pay, which lifts all salaries.

In the four years through 2013, the union refrained from seeking any increase in base pay. Last year, it got 1,300 yen after asking for 3,000 yen. This year it's seeking 3,000 yen again, but could end up with about half that. The union doesn't disclose what the increases mean in percentage terms.

Akio Toyoda, grandson of Kiichiro, raised the specter of the 1950 crisis as recently as November, when he urged managers and union leaders to share a sense of urgency. Later in the month, he stressed how automation and other technologies were making the auto industry's future uncertain.

“A crucial battle has begun, not one about winning or losing, but one about surviving or dying,” Toyoda said in a company release.

Toyoda's concern may shape wage deals across Japan over the next few months as managers wait to see what Toyota agrees.

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The slow pace of wage gains in Japan has been a thorn in the side of Finance Minister Taro Aso, who has frequently questioned why companies don't use some of their swollen cash piles to reward employees.

“If business owners understand that the situation is no longer deflationary, they would've increased salaries, bonuses and capital investment,” Aso said on Dec. 26. “The economic improvement would've been felt more widely.”

Retained earnings -- the cash pile of Japanese companies -- has increased by a third to about 406 trillion yen in the four years through March 2017, according to the finance ministry. Toyota's retained earnings were 19 trillion yen at the end of 2017, a 53 percent increase from five years ago.

But the trillions of yen Toyota has piled up have nothing to do with wage negotiations, said Kosuke Hirano, deputy secretary general of the Federation of All Toyota Workers' Unions, an umbrella organization for unions at Toyota, its subsidiaries and suppliers.

“We don't use it at all as a basis to form our request,” said Hirano. “We don't say: ‘Give us money because you got a lot of money this year.'”

Instead, it's job security and steady raises during an employee's career that are paramount. Those guaranteed seniority-based pay increases are possible because of low starting salaries. A new employee with a master's degree earned 229,000 yen per month in 2017, according to the company.

Which means that, when Toyota announces the result of its pay negotiations in mid-March, Prime Minister Abe may have to wait a little longer to achieve his wage goal.

--With assistance from Nao Sano and Kevin Buckland

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Adam Majendie

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