Wage hikes in Japan are expected to come under pressure as more companies are interested in switching to merit-based pay over increasing competition among workers to perform better. A hike in wages is essential towards improving Japan’s inflation which has remained well below the central bank’s target for some time.

Broad wage rises across companies is on the decline with more workplaces favoring a merit-based system to compensate their workers, and labor unions are also increasingly opting for such a model. In addition such a system would prove more beneficial to companies who are struggling in the wake of global trade tensions and the recent coronavirus outbreak which has caused a slowdown.

The Japanese government on the other hand is keen on blanket wage increases to boost consumer consumption which could help drive inflation higher. There is also a risk that the merit-based model could increase the demand for young workers and increase the wage gap among workers within Japan.

According to data from Japan Productivity Centre, the number of companies in Japan who have opted for a merit based pay model has increased from 17.7% in 1999 to 57.8% in 2018. Leading electronics manufacturer Fujitsu has already adopted such a model while Toyota is considering shifting to such a system.