This is the second installment of METI's "New Directions in Economic and Industrial Policy" 60-second quick explanation series published on July 15, 2025, explaining the relationship between sustained wage increases and growth-oriented domestic investment.
Despite improvements in labor productivity over the past 30 years in Japan, real wages have stagnated. The main cause has been deteriorating terms of trade: while import prices for energy and raw materials have soared, Japan has been unable to sufficiently raise export prices for electrical products and services like accommodation and dining. Looking at the 26-year average from 1995 to 2021, while labor productivity growth was comparable to other major developed countries, deterioration in terms of trade was the largest factor in real wage stagnation, with greater impact than social security burden or labor share factors.
Since the COVID pandemic, the business environment has changed as resource and raw material price increases have made price hikes, previously difficult due to business customs, more commonplace. This environmental change creates opportunities for companies to produce high value-added products and services and set appropriate prices. The key is creating globally competitive high value-added products and services through innovation and selling them at prices valued internationally. Achieving price pass-through to overseas markets across Japan as a whole is crucial for wage increases exceeding inflation.
The "New Directions in Economic and Industrial Policy" deploys proactive industrial policies aimed at "expanding domestic investment, accelerating innovation, and increasing incomes." Policy effects are already visible with large-scale investment cases increasing nationwide. To prevent this trend from being temporary, it's necessary to continuously increase next-generation investments such as R&D and software while enhancing corporate predictability.
The article demonstrates the importance of realizing a virtuous cycle of sustained wage increases and economic growth through shifting from a shrinking mindset to a growth mindset.