[2026 Spring Labor Negotiations] The Story Behind the “Wage Gap” Between Large and Small-to-Medium-Sized Companies: The Struggles and Limitations of Small-to-Medium-Sized Enterprises Unable to Pass On Price Increases

The 2026 spring wage negotiations (Spring Living Wage Struggle) appear poised to maintain historically high wage increases—“exceeding 5% for the third consecutive year”—primarily among major corporations.

However, behind this glamorous news, small and medium-sized enterprises (SMEs)—which account for more than 90% of Japanese companies—are crying out that “we’ve reached our limit” and “we don’t have the funds for any further wage increases.”

“Rengo,” the national central organization of labor unions, set a high wage increase target of “6% or more” for small and medium-sized enterprises (SMEs) in an effort to correct the disparity between large corporations and SMEs, but the reality is harsh.
Far from narrowing the gap with large corporations in terms of both amount and rate, the gap is actually showing signs of widening.

Why aren’t wage increases progressing at SMEs?
Two structural problems lie at the root of this: the “barrier to passing on price increases” and the “exhaustion of financial resources due to defensive wage hikes.”

1. Preliminary Results of the 2026 Spring Labor Negotiations: The Reality of “5.10%” for Large Companies vs. “4.84%” for SMEs

According to the aggregate results of the 2026 spring wage negotiations released by the Japanese Trade Union Confederation (RENGO) (4th round of responses), the overall average wage increase rate was 5.08%, maintaining the 5% mark for the third consecutive year.
However, when examining the breakdown by “company size,” a clear dichotomy (polarization) emerges.

This falls far short of the Rengo’s goal of “at least 6% for small and medium-sized enterprises” to correct the disparity, and as a result, the wage gap between large companies and small and medium-sized enterprises is set to widen further.

2. Why Doesn’t the Gap Disappear? The “Barrier to Price Pass-Through” That Prevents Small and Medium-Sized Enterprises from Securing Funds for Wage Increases

The primary reason SMEs are unable to raise wages—even if they want to—is that they cannot sufficiently pass on (pass through) the increases in raw material costs, energy prices, and “labor costs” to the sales prices charged to their large corporate clients.
The “Follow-up Survey on the Price Negotiation Promotion Month (March 2026)” released by the Ministry of Economy, Trade and Industry (METI) and the Small and Medium Enterprise Agency provides data confirming this current harsh reality.

• The overall price pass-through rate is “54.2%.”
  Even when costs rise by 100 yen, only 54 yen can be passed on to prices, while small and medium-sized enterprises are absorbing the remaining 46 yen at their own expense.
• The pass-through rate for “labor costs” is a mere 50.0%
  Compared to raw material costs (55.7%), passing on “labor costs”—which are directly linked to wage increases—has proven the most difficult, with the rate remaining at just half that level.
• The problem becomes more severe as the subcontracting hierarchy deepens
  Compared to first-tier contractors, the further down the supply chain one goes—to third- and fourth-tier subcontractors—the more difficult it becomes to even broach the subject of price negotiations.

Many small and medium-sized enterprises (SMEs) rely on contracts from large corporations, and there is no end to cases where they give up on negotiating out of fear that “if we ask for a price increase, we might lose the next order.”
As a result, the very “funds” needed to finance wage increases continue to dwindle.

3. “Defensive Wage Increases” Without Improved Performance Are Eroding the Financial Health of Small and Medium-Sized Enterprises

Despite a lack of funds, a severe labor shortage is the reason why many small and medium-sized enterprises were forced to implement wage increases in the “high 4% range” during the 2026 spring wage negotiations.

What Is a Defensive Pay Raise?

This refers to a pay raise that is implemented out of a sense of crisis—not because business performance has improved, but because of concerns such as, “If we don’t raise wages, our current employees will leave for other companies (such as large corporations or part-time jobs with higher hourly wages),” or “Even if we post job openings, no one will apply”—even if it means stretching the company’s resources.

According to a survey by Tokyo Shoko Research, many small and medium-sized enterprises (SMEs) that have raised wages reported that they “have not been able to pass on the costs sufficiently.”
In other words, they are raising wages at their own expense even though they are not turning a profit.
Compounded by a significant increase in the minimum wage, these companies have been forced to raise starting salaries for young employees. As a result, a new distortion—the collapse of the wage structure—has emerged, in which “the wage gap with mid-career and veteran employees is narrowing, leading to a decline in internal motivation.”

4. “Three Prescriptions” for the Survival of Small and Medium-Sized Enterprises After 2026

What measures will small and medium-sized enterprises need to take to break out of the current situation, where they are unable to pass on price increases and their financial strength continues to erode due to defensive wage hikes?

① “Aggressive Price Negotiations” Leveraging Legislative Reforms and Guidelines

The government has enacted the “Act on the Fairness of Transactions with Small and Medium-Sized Contractors” (Fair Transactions Act), aimed at standardizing subcontracting practices, and has issued guidelines such as the “Guidelines on Price Negotiations for the Appropriate Pass-Through of Labor Costs.”
Using these as leverage, it is essential to present well-founded data (quotes) and persistently demand that large corporations absorb labor costs.

② “Improving Productivity” Through Labor-Saving Investments and the Use of IT and AI

Given the labor shortage, it is necessary to shift to a structure that maximizes profits with a limited workforce.
By reviewing business processes and introducing digital tools, AI, and automated equipment (labor-saving investments), companies can boost labor productivity and generate the funds needed for wage increases on their own.

③ Clarifying “Added Value” and Diversifying Business Partners

We need a long-term strategy to break away from business models that rely on a single parent company (large corporation), clarify our company’s unique strengths and “distinctive added value,” and develop new customers and markets where we can retain control over pricing.

Summary: The Key to Japan’s Economic Revival Lies in “Price Pass-Through by Small and Medium-Sized Enterprises”

While the spring 2026 wage negotiations highlighted the strong performance of large corporations, they also once again brought to light Japan’s chronic structural problem: “a lack of funds among small and medium-sized enterprises (SMEs) due to a failure to pass on price increases.”
Unless wages at small and medium-sized enterprises—which support the majority of Japan’s employment—rise sustainably at a rate significantly exceeding inflation, neither a true “complete escape from deflation” nor “domestic demand-led economic growth” can be achieved.
Large corporations are strongly urged to adopt a sincere attitude toward accepting the “pass-through of labor costs” by small and medium-sized enterprises, from the broader perspective of maintaining the entire supply chain.