Economy

The fracturing of the global trading system was the subject of much earnest debate last week at Davos. Taking centre stage was how the EU would respond to the contentious US Inflation Reduction Act — a $369bn package which aims to stimulate its green energy and electric vehicle industries. European Commission president Ursula von der Leyen weighed in with plans to temporarily water down state aid regulations and pump cash into strategic climate-friendly businesses. Her announcement underscored a new era of green and technological rivalry between the major trading partners. How healthy that contest will be, not just for them but for the global economy, will hinge on whether both can co-operate in setting the rules of the game.Since the IRA was passed in August, it has drawn concern in Europe. It contains elements that are an affront to free trade — even if these were a product of horse-trading to get the bill through rather than a deliberate aim. But it is also unapologetically ambitious in channelling funds rapidly towards tackling climate change, something the EU has long urged the US to do. Both of these elements, and the competitive threat to European industry, added pressure on the EU to start pulling together its own response. The IRA was, no doubt, a wake-up call for Europe to go further on its existing climate change efforts, but if the collateral damage is a collapse in the US and EU’s relationship, and a race to the bottom on competition rules, it will come at a severe cost.The biggest bones of contention over the IRA are subsidies and tax credits for US-manufactured products ranging from solar panels to electric vehicles. The domestic content requirements appear to run counter to the World Trade Organization’s rules on trading without discrimination. They skew the competitive playing field, encourage self-sufficiency and risk inspiring a retaliatory subsidy race in kind. Where such discrimination prevails it attracts production to where it is less efficient, while the innovative hand of competitive forces from imports would be subdued, which would undermine domestic strategic aims. In a splintering geopolitical environment, the US and EU need to be working together and not engaging in a wasteful battle to draw business and investment away from each other. (The EU also needs to ensure a level playing field within its own internal market.) A fallout on trade risks stifling EU and US collaboration on issues of global importance, including climate change, debt distress and the stance towards China. Subsidies are nonetheless set to play a big part in how both shore up efforts to reduce emissions, harness new technologies and support national security, which makes co-operation vital. Avoiding distortionary subsidies, and having clear rules on the boundaries of what support is acceptable, is key. Reform of the WTO would be a starting point but given its broad membership and the US’s blockage of appointments to the appellate body, that will not be straightforward. This places greater emphasis on regular bilateral dialogue between the US and EU to help avoid the risk of hobbling each other or sparking undesirable competitive practices. Negotiations for EU exemptions to the IRA’s domestic content requirements for electric vehicle batteries, among other issues, are at least taking place and offer hope of collaboration. Navigating the line between supporting domestic goals while avoiding beggar-thy-neighbour measures will be challenging. Success will depend on the strength of dialogue over the ground rules. As the EU trade commissioner Valdis Dombrovskis said in Davos, the EU and US should be “building transatlantic value chains, not breaking them apart”. More

“Expect us to raise rates by 0.5% in February and March and expect us to not be done by then and that more steps will follow in May and June,” Knot said.In a separate interview with Italian newspaper La Stampa published on Sunday, Knot said it was “too early to tell” if the ECB could slow down the pace of its rate increases by the summer.”At some point, of course, the risks surrounding the inflation outlook will become more balanced,” he said.”That would also be a time in which we could make a further step down from 50 to 25 basis points, for instance. But we are still far away from that.” More

TOKYO (Reuters) – Japanese Prime Minister Fumio Kishida said on Sunday he would nominate a new Bank of Japan governor next month, as markets test whether the central bank will change the ultra low-rate policy of the dovish Haruhiko Kuroda.Kishida initially told a TV Tokyo programme that he would decide on Kuroda’s replacement by considering the economic situation for April, but when pressed he acknowledged this would likely be in February, “considering parliament’s schedule.”He did not elaborate.Kuroda, whose five-year term ends on April 8, has stuck with policies aimed at stoking price rises and growth, even with inflation at 41-year highs and double the BOJ’s target, and as central banks elsewhere have been raising interest rates.The terms of Kuroda’s two deputies end on March 19. The three nominations must be approved by both houses of parliament.The BOJ stuck to its ultra-easy policy on Wednesday, defying investors who have recently sought to break the bank’s cap on the 10-year government bond yield. But with even Kuroda sounding bullish about wage rises, expectations are growing that the BOJ will end its expansionist experiment this year.Last week’s test followed the BOJ’s surprise December decision to double the target band for the yield to 0.5% above or below zero.Former BOJ board member Sayuri Shirai, an advocate of reviewing the current stimulus who is considered a candidate for deputy governor, said on Sunday the BOJ should make its government bond buying more flexible but that low interest rates are warranted.There is also speculation about changes to a policy accord between the central bank and the government, in which the BOJ pledges to achieve its 2% inflation target as early as possible.Kishida said it was too early to comment on whether the accord needed to be altered but said there will be no change to the “basic stance” that his government and the BOJ work together “to achieve economic growth that involves structural wage hikes and reach the price-stability target stably and sustainably”. More

A federal benefit guaranteeing free school meals to millions more students has expired as food prices have risen. Many families are feeling the pinch.Like other parents, April Vazquez, a school nutrition specialist in Sioux Falls, S.D., is cutting coupons, buying in bulk and forgoing outings and restaurant meals. Still, a hot lunch in the school cafeteria for her three children is now a treat she has to carefully plan in her budget.The expiration of waivers that guaranteed free school meals for nearly 30 million students across the United States during the pandemic has meant that families like Ms. Vazquez’s who earn just over the income threshold no longer qualify for a federal program allowing children to eat at no cost.As pandemic-era assistance programs lapse and inflation reaches record highs, Ms. Vazquez is hardly alone. The number of students receiving free lunches decreased by about a third, to around 18.6 million in October, the latest month with available data. In comparison, about 20.3 million students ate free in October 2019, before the pandemic. That drop can be attributed to several factors, like being on the cusp of eligibility, lack of awareness that the program had ended by the start of the school year and fewer schools participating in the program overall.“It’s just making things a hell of a lot harder at the most difficult moment that I think American families have seen in a generation,” said Keri Rodrigues, co-founder and president of the National Parents Union network.For Ms. Vazquez, returning to a reality where she must pay full price for a school meal — about $3 or $4 for each child — is trying, and most days, her children bring a packed lunch. (Bagels, cream cheese and apples are typical; grapes and strawberries are rare because they are too expensive.)“It’s painful to know that my kids aren’t going to get free or reduced,” she said.The number of students receiving free lunches decreased by about a third, to about 18.6 million last October.Amber Ford for The New York TimesBefore the pandemic, Ms. Vazquez worked part-time as a special education assistant and her children teetered between qualifying for free or reduced-price meals year to year. But when she took a full-time job as a nutritionist in August 2021, her salary was just enough to bump her family above the income threshold for either benefit: about $42,000 annually for free meals for a family of five and $60,000 for reduced-price meals.“That was actually a worry when I applied for this position, because you don’t know what’s going to happen, am I going to get disqualified for this?” she said, adding that she ultimately took the job with a view toward long-term financial stability.Even as some parents have seen their wages increase and the criteria for free and reduced-price meals expand, those boons have done little to blunt the impact of rising food costs.From the 2019-20 school year to this school year, the income eligibility for free and reduced-price meals has increased by about 7.8 percent. Average hourly wage growth in that same period grew by 15.1 percent. Consumer prices, though, have risen by 15.4 percent, and food prices by 20.2 percent, surpassing wage growth.More on U.S. Schools and EducationChatGPT: OpenAI’s new chatbot is raising fears of students cheating on their homework. But its potential as an educational tool outweighs its risks, our columnist writes.Boosting Security: New federal data offers insight into the growing ways that schools have amped up security over the past five years, as gun incidents on school grounds have become more frequent.Teaching Climate Change: Many middle school science standards don’t explicitly mention climate change. But some educators are finding ways to integrate it into lessons. In Florida: The state will not allow a new Advanced Placement course on African American studies to be offered in its high schools, stating that the course is not “historically accurate.”In the Sioux Falls School District — where Ms. Vazquez works and where her children attend school — about 41 percent of children qualified for free or reduced-price lunch this school year, compared with about 49 percent before the pandemic, said its nutrition director, Gay Anderson. Some parents have remarked that they would be “better off missing half a week’s work to get that free meal,” she said.“The income eligibility guidelines are just not keeping pace with inflation, and families are barely making ends meet. So what we’re seeing is a lot of people are saying, ‘I can’t believe I don’t qualify as I always did.’ If they are making a dollar more, or whatever, that will do it,” Ms. Anderson said.At Wellington Exempted Village Schools in northeastern Ohio, Andrea Helton, the nutrition director, described denying the program to nearly 50 families in a school district of about 1,000 students. She recalled a single mother who lamented, “I missed the cutoff for reduced meals by $100 of gross income.”But Ms. Helton said, “There’s nothing I can do, and it’s heartbreaking.”Andrea Helton is the nutrition director at Wellington Exempted Village Schools in northeastern Ohio. Amber Ford for The New York TimesFamilies are also struggling to navigate a maze of new rules or, unaware that the program had ended, contending with having to pay for meals that had once been free.Megan, a mother of three school-aged children in Ms. Helton’s district who asked to be identified only by her first name because of privacy concerns, said that she had grown accustomed to the program. So when the school pressed her for money owed for unpaid lunches, “it was a shocker.”By the end of the fall semester, she had racked up $136 in debt.When Megan learned that holiday donations to the school district had wiped out that sum, “I just melted into a puddle because when you’re down to that last $100, the last thing you want to have to worry about is whether your kids are eating or not,” she said through tears.It is difficult to estimate how many students are now going hungry. But school officials and nutrition advocates point to proxy measurements — debt owed by families who cannot afford a school meal, for example, or the number of applications for free and reduced-price meals — as evidence of unmet need.In a survey released this month by the School Nutrition Association, 96.3 percent of school districts reported that meal debt had increased. Median debt rose to $5,164 per district through November, already higher than the $3,400 median reported for the entire school year in the group’s 2019 survey.The end of universal school meals has led fewer schools to participate in the program overall: 88 percent of public schools are operating a meal program this school year.Alyssa Schukar for The New York TimesAt school, Ms. Vazquez described witnessing children sitting in the cafeteria with packed lunches consisting of only a bag of chips or an apple. Others have inched toward the cash register with a lunch tray, a look of fear and recognition flashing across the “kid’s eyes when they see the computer, like, ‘Yeah, I know I’m negative, but I want to eat,’” she said.“You see other kids struggle and knowing, hey, I’m in the same boat,” she added. “I know exactly what you’re going through.”The end of universal school meals has led fewer schools to participate in the program overall: About 88 percent of public schools are operating a meal program this school year, compared with 94 percent in the previous school year, and 27.4 million children were eating a school lunch in October, compared with about 30 million in May, the last month of the school year with the program in place. That can create a vicious cycle in which lower participation translates to higher costs per meal, forcing schools to raise the price of a meal and squeezing out even more families, said Crystal FitzSimons of the Food Research and Action Center, which routinely talks to schools about their nutrition programs. Schools and families alike face other administrative and financial complications as school officials grapple with soaring wholesale costs and labor shortages, highlighting other challenges in increasing participation. Now officials must process paperwork to verify income eligibility, devote time and personnel for debt collection and plan ahead for expected revenue and reimbursement rates.At Prince William County Schools in Virginia, Adam T. Russo, the nutrition director, said his office has had to dedicate more resources for outreach and education to inform parents of the policy change. Already, he relies on a multilingual staff to serve the 90,000 students in his district, one of the most diverse in the state.Adam T. Russo relies on a multilingual staff to serve the 90,000 students in his district.Alyssa Schukar for The New York TimesFor many parents, he said, the process was new and potentially confusing given that universal free meals had been in place since some of their children had started school.“If your kid was in kindergarten, first grade, second grade, this is a completely foreign process to your family,” he said. “It’s been table stakes, and we’ve pulled the tablecloth out from under our families.”The application process, as well as the stigma associated with receiving a free or reduced-price lunch, can be prohibitive, advocates say. In 2019, even as some 29.6 million students were eligible for free or reduced-price meals, only 22 million received one, according to research. And about 20 percent of eligible households whose children did not receive either benefit reported food insecurity.“The effort it takes to make sure these resources actually hit those kids, for what that costs, it’s a hell of a lot easier to just say, listen, food is free,” Ms. Rodrigues said.The universal free school meal program pushed the federal cost of school nutrition programs from $18.7 billion in the 2019 fiscal year to $28.7 billion in the 2022 fiscal year, according to data from the Agriculture Department, which administers the program. The department does not have an official estimate of the cost of permanently enacting the policy, a spokeswoman said.Such an initiative has drawn widespread support, with polls showing 74 percent of voters and 90 percent of parents favoring the idea, but federal enactment seems unlikely. Republican lawmakers in Congress oppose permanently extending the policy, arguing that free meals should serve only the neediest and that pandemic-era policies must eventually end.Still, some states — and some parents — have been spurred to take action. For Amber Stewart, a mother of five in Duluth, Minn., the program was lifesaving.Before the pandemic, when the family owed money for meals, her daughter would receive a cold cheese sandwich and a carton of milk, signaling to classmates she could not afford the hot meal. Stern letters demanded repayment and warned of consequences.“Then the pandemic rolled around and everybody was eligible for the free meals, and they delivered it or you could go pick it up,” said Ms. Stewart, who asked to be identified by her maiden name. “It was amazing.”Intent on seeing the program enacted permanently, Ms. Stewart is now lobbying the Minnesota legislature to adopt universal free schools meals statewide, a policy that the governor recently endorsed. Under the new income guidelines, Ms. Stewart’s children now qualify for reduced-price meals. And because of a state law that covers the fees normally owed by families in that category, they are not charged the 35 or 50 cents for breakfast or lunch.That has been crucial, she said, because even after weekly trips to the food bank, she does not have nearly enough to get by.“Our money is really tight,” she said. “With the cost of groceries and everything, we’re barely making it.” More

Two decades of tax cuts, recession responses and bipartisan spending fueled more borrowing — contributing $25 trillion to the total and setting the stage for another federal showdown.WASHINGTON — America’s debt is now six times what it was at the start of the 21st century. It is the largest it has been, compared with the size of the U.S. economy, since World War II, and it’s projected to grow an average of about $1.3 trillion a year for the next decade.The United States hit its $31.4 trillion legal limit on borrowing this past week, putting Washington on the brink of another fiscal showdown. Republicans are refusing to raise that limit unless President Biden agrees to steep spending cuts, echoing a partisan standoff that has played out multiple times in the last two decades.But America’s ballooning debt is the result of choices made by both Republicans and Democrats. Since 2000, politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers and emergency measures to help the nation endure two debilitating recessions.“There have been bipartisan tax cuts and bipartisan spending increases” driving that growth, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget and perhaps the pre-eminent deficit hawk in Washington. “It’s not the simple story of Republicans cut taxes and Democrats grow spending. Actually, they all like to do all of it.”Few economists believe the level of debt is an economic crisis at the moment, though some believe the federal government has become so large that it is taking the place of private businesses, hurting growth in the process. But economists in Washington and on Wall Street are warning that failing to raise the debt limit before the government begins shirking its bills — as early as June — could prove catastrophic.Despite all the fighting, lawmakers have taken few steps to reduce the federal budget deficit they have produced. It has been nearly a quarter-century since the last time the government spent less than it received in taxes.Because spending programs today are so politically popular, and because retiring baby boomers are driving up the cost of programs like Social Security and Medicare every year, budget experts say it is unrealistic to expect the books to balance again for another decade or more.The White House estimates that borrowed money will be necessary to cover about one-fifth of a $6 trillion federal budget this fiscal year — a budget that includes military spending, the national parks, safety net programs and everything else the government provides.In just two decades, America has added $25 trillion in debt. How it got itself into this fiscal position has its roots in a political miscalculation at the end of the Cold War.President Lyndon B. Johnson signing Medicare into law in 1965. In part because of the popularity and rising costs of programs like Medicare, federal deficits are expected to continue for at least a decade.Associated PressIn the 1990s, America reaped a so-called peace dividend. It reduced spending on the military, believing it would never have to invest as much in national security as it had when the Soviet Union was a threat. At the same time, a dot-com boom delivered the highest federal tax receipts, as a share of the economy, in several decades.Understand the U.S. Debt CeilingCard 1 of 5What is the debt ceiling? More

MADRID (Reuters) – The Spanish city of Malaga and its Costa del Sol surroundings are seeing a surge in people moving in from the rest of Europe as lifestyle and working habits change after the COVID-19 pandemic, according to two of Spain’s largest homebuilders.Aedas Homes said its sales to foreigners in Costa del Sol doubled last year, from 124 units sold in 2021 to 248 in 2022, while Neinor Homes SA said about 40% of young people taking on long-term rents in the city since they launched a rental division in 2020 were foreign. That compares with almost no international customers elsewhere in Spain.Property purchases by foreigners increased by 62% from a year earlier in the region of Andalusia, which includes Malaga, in the first half of 2022, according to the Centre for Statistical Information of Notaries.Malaga’s town council said a platform launched in February 2021 to help so-called digital nomads, www.malagaworkbay.com, had received more than 160,000 visits by the end of 2022.Millions of workers were forced to work from home during lockdowns aimed at stalling the spread of COVID-19 in 2020 and many companies have allowed the shift to become permanent – with employees discovering they can now work from anywhere.Aedas CEO David Martinez said the homebuilder had seen a spike in sales to people from Poland and the Czech Republic, countries feeling the proximity to the Ukraine war, as well as Belgians, French and Nordics.”I don’t think it’s just the war,” Martinez told Reuters. “I think it’s that lots of people have had a rethink about their lives post-COVID.”TECH HUBMalaga has been working to position itself as a tech hub that can attract foreign talent rather than just a gateway to the beaches and golf courses further south. The local government last year eliminated a wealth tax that obliges residents and non-residents to pay income tax on money held abroad. The policy is bearing fruit. Google-owner Alphabet (NASDAQ:GOOGL) Inc. chose the city as the location for a European cybersecurity hub because of the number of tech start-ups already based there, according to the Spanish government. Citigroup (NYSE:C) announced in March 2022 plans to open a hub for junior investment bankers in the city, offering what it said was “a better equilibrium between work and private life to attract young talent”.The pull of southern Europe for northern Europeans was amplified by the pandemic, Neinor Homes CEO Borja Garcia-Egotexeaga told Reuters, as companies struggling to hold on to their best employees are giving them the freedom to work from sunnier climes. “Companies in Europe could consider measures such as lowering the salary or paying less to those who seek to work remotely from other countries, because the employee will be happy because they have some freedom,” he said. More

Brazil and Argentina will this week announce that they are starting preparatory work on a common currency, in a move which could eventually create the world’s second-largest currency bloc. South America’s two biggest economies will discuss the plan at a summit in Buenos Aires this week and will invite other Latin American nations to join.The initial focus will be on how a new currency, which Brazil suggests calling the “sur” (south), could boost regional trade and reduce reliance on the US dollar, officials told the Financial Times. It would at first run in parallel with the Brazilian real and Argentine peso.“There will be . . . a decision to start studying the parameters needed for a common currency, which includes everything from fiscal issues to the size of the economy and the role of central banks,” Argentina’s economy minister Sergio Massa told the Financial Times. “It would be a study of mechanisms for trade integration,” he added. “I don’t want to create any false expectations . . . it’s the first step on a long road which Latin America must travel.”Initially a bilateral project, the initiative would be offered to other nations in Latin America. “It is Argentina and Brazil inviting the rest of the region,” the Argentine minister said. A currency union that covered all of Latin America would represent about 5 per cent of global GDP, the FT estimates. The world’s largest currency union, the euro, encompasses about 14 per cent of global GDP when measured in dollar terms.Other currency blocs include the CFA franc which is used by some African countries and pegged to the euro, and the East Caribbean dollar. However these encompass a much smaller slice of global economic output.The project is likely to take many years to come to fruition; Massa noted that it took Europe 35 years to create the euro.An official announcement is expected during Brazilian president Luiz Inácio Lula da Silva’s visit to Argentina that starts on Sunday night, the veteran leftist’s first foreign trip since taking power on January 1.Brazil and Argentina have discussed a common currency in the past few years but talks foundered on the opposition of Brazil’s central bank to the idea, one official close to the discussions said. Now that the two countries are both governed by leftwing leaders, there is greater political backing.A Brazilian finance ministry spokesman said he did not have information about a working group on a common currency. He noted that finance minister Fernando Haddad had co-authored an article last year, before he took his current job, proposing a south American digital common currency.Trade is flourishing between Brazil and Argentina, reaching $26.4bn in the first 11 months of last year, up nearly 21 per cent on the same period in 2021. The two nations are the driving force behind the Mercosur regional trade bloc, which includes Paraguay and Uruguay. The attractions of a new common currency are most obvious for Argentina, where annual inflation is approaching 100 per cent as the central bank prints money to fund spending. During President Alberto Fernández’s first three years in office, the amount of money in public circulation has quadrupled, according to central bank data, and the largest denomination peso bill is worth less than $3 on the widely used parallel exchange rate.However, there will be concern in Brazil about the idea of hitching Latin America’s biggest economy to that of its perennially volatile neighbour. Argentina has been largely cut off from international debt markets since its 2020 default and still owes more than $40bn to the IMF from a 2018 bailout.Lula will stay in Argentina for a summit on Tuesday of the 33-nation Community of Latin American and Caribbean States (CELAC), which will bring together the region’s new crop of leftwing leaders for the first time since a wave of elections last year reversed a rightwing trend. Colombia’s president Gustavo Petro was likely to attend, officials said, along with Chile’s Gabriel Boric and other more controversial figures such as Venezuela’s revolutionary socialist president Nicolás Maduro and Cuban leader Miguel Díaz-Canel. Mexico’s president Andrés Manuel López Obrador generally shuns overseas travel and is not scheduled to participate. Protests against Maduro’s attendance are expected in Buenos Aires on Sunday.

Argentina’s foreign minister Santiago Cafiero said the summit would also make commitments on greater regional integration, the defence of democracy and the fight against climate change.Above all, he told the Financial Times, the region needed to discuss what sort of economic development it wanted at a time when the world was hungry for Latin America’s food, oil and minerals. “Is the region going to supply this in a way which turns its economy [solely] into a raw material producer or is it going to supply it in a way which creates social justice [by adding value]?,” he said.Alfredo Serrano, a Spanish economist who runs the Celag regional political think-tank in Buenos Aires, said the summit would discuss how to strengthen regional value chains to take advantage of regional opportunities, as well as making progress on a currency union.“The monetary and foreign exchange mechanisms are crucial,” he said. “There are possibilities today in Latin America, given its strong economies, to find instruments which substitute dependence on the dollar. That will be a very important step forward.” Manuel Canelas, a political scientist and former Bolivian government minister, said that CELAC, founded in 2010 to help Latin American and Caribbean governments co-ordinate policy without the US or Canada, was the only such pan-regional integration body which had survived over the past decade as others fell by the wayside.However, Latin America’s leftist presidents now face more difficult global economic conditions, trickier domestic politics with many coalition governments, and less enthusiasm from citizens for regional integration.“Because of this, all the steps towards integration will certainly be more cautious . . . and will have to be focused directly on delivering results and showing why they are useful”, he cautioned.Additional reporting by Bryan Harris in São Paulo More

A day after the owner of Uniqlo clothing brand stunned the nation with a plan to raise wages in Japan by up to 40 per cent, its chief financial officer told investors the pay hike was not a one off. “We want workers to work hard under this new system and if sales and profits rise, there will be room to raise our remuneration to a much higher level,” Fast Retailing’s finance chief Takeshi Okazaki said this month. In a country where companies have resisted raising pay and the workforce has refrained from aggressive salary demands for most of the past three decades, Fast Retailing’s move is a watershed for the government and the Bank of Japan’s battle to lift the economy out of deflation.If other companies follow suit and the wage hikes continue, analysts say the ramifications could be far-reaching. The creation of a virtuous cycle of rising wages, consumption and prices would allow Japan to finally move away from the negative interest rates and ultra-loose monetary policies that have defined its struggle with low inflation and low growth.Haruhiko Kuroda, the BoJ’s longest-serving governor who will step down in April, last week defied market pressure and kept the key pillars of his monetary easing programme unchanged, stressing that wage growth was not sufficient despite the global inflation shock.“Many of the current working population are very sceptical about prices and wages rising since they have never experienced it,” said Hiroyuki Ueno, chief strategist at Sumitomo Mitsui Trust Asset Management. “Even if you look back at the past 20 years, we’ve never seen this much pressure for company management to raise wages to address a rise in prices. This could be the turning point.”Fast Retailing CFO Takeshi Okazaki sees room for greater wage increases © Kiyoshi Ota/BloombergSo far, the signs are encouraging. Before Fast Retailing’s announcement, Canon, the camera and printer maker, revealed it would raise the monthly pay of its 26,000 employees by an average 3.8 per cent. Suntory Holdings, the drinks group behind Jim Beam and Yamazaki, aims to raise wages in Japan by 6 per cent. Eye drops-maker Rohto will revise the seniority-based component of its pay structure for the first time in 22 years, resulting in an average 7 per cent hike for employees in 2022.The moves follow calls from Prime Minister Fumio Kishida for companies to raise wages. Such government-led efforts are not new: the late former prime minister Shinzo Abe spent eight years trying to convince them they could not continue offering some of the lowest average increases in the OECD. Yamazaki brand owner Suntory Holdings aims to raise wages in Japan by 6 per cent © Noriko Hayashi/BloombergBut while Abenomics led to a short-term rise in wages, Kishida’s “new capitalism” programme aims to result in more organic growth in salaries that would allow the BoJ to sustainably meet its 2 per cent inflation target. Japan’s core inflation, which does not include volatile fresh food prices, hit 4 per cent in December, its fastest pace in 41 years. In a sign of changing times, the Japanese Trade Union Confederation is seeking a 3 per cent year-on-year increase in base pay in the shunto spring wage negotiations, its highest demand since 1995. On Tuesday, Keidanren, Japan’s largest business lobby, called on companies to proactively raise pay as “corporate social responsibility”.Goldman Sachs expects a raise in overall annual wages of about 2.5 per cent from the spring negotiations — but that would fall short of the overall 3 per cent wage growth the BoJ has said is needed for its inflation target. And the shunto negotiations involve only the largest corporations. Company executives warn that the hurdles to salary increases are especially high for the small and medium sized enterprises that employ at least 70 per cent of Japanese workers. While companies such as Fast Retailing have managed to increase their prices to reflect the rising cost of materials, smaller businesses have struggled to sufficiently pass on higher costs. “We can’t possibly think about raising our base pay. Our priority is to maintain our business,” said Kimihiko Yamashita, who runs industrial parts maker Araie Manufacturing in Ishikawa prefecture. Araie recently managed to convince customers to accept a 3 per cent price rise, but this would only cover its losses from surging energy and materials costs, Yamashita said. Adjusted for consumer inflation, Japanese real wages were actually down 3.8 per cent year-on-year in November.A structural issue hindering higher salaries is the lack of workforce mobility because of the country’s longstanding system of lifetime employment. “Unless there is more liquidity in Japan’s job market, the wage increases will be one-off and unsustainable,” said Ken Shibusawa, chair of Commons Asset Management and a core member of a panel drafting Kishida’s economic policy. © Noriko Hayashi/BloombergJapanese labour laws make it difficult for companies to lay off full-time employees. In return for workers being given jobs for life, unions often have a collaborative relationship with company management, making it difficult for them to issue tough salary demands. That makes it less likely for Japan to develop the kind of inflationary wage spiral currently being fuelled by widespread strikes in the UK.Government officials have now realised that tax breaks already introduced for companies that hike wages are not enough, with Kishida also promising investment in retraining Japanese workers to help them shift to new industries that are expanding.“We are not sure whether Japan will become as liquid as the US market, but Japan will gradually become more liquid in the mid to long term through globalisation, changes in industry structures, and shrinking workforce population,” said Soichiro Minami, chief executive of Visional, which operates an online job site.Many Japanese companies operating globally are already shifting away from seniority-based pay in order to recruit international talent, and hiring competition in a tight labour market should also bolster salary levels.“If we’re going to ask employees in Japan to do global quality work, then we need to bring Japanese remuneration to international standards,” Fast Retailing’s Okazaki said. “Even with this latest revision to our pay system, it’s not yet at a global level.”Additional reporting by Leo Lewis in Tokyo More