MEIWA, Japan >> When Costco Wholesale opened its warehouse in a rural Japanese town not far from Tokyo last year offering hundreds of jobs at eye-popping pay, a nearby noodle shop chain took a drastic step: it hiked hourly wages by a third.

It was an almost unthinkable decision for Yamada-udon, which sells 390-yen ($2.48) bowls of noodles and for which the slightest rise in cost requires acrobatic scrambling to stay in business.

“For us, even a one- or two-yen rise in raw materials costs is tough, so to increase hourly pay by even 10 yen is extremely challenging as we need to generate far more sales,” said marketing director Takehiro Ehashi.

After a round of internal discussions, Yamada-udon decided to renovate the store, in Meiwa, Gunma prefecture, offering 1,300 yen an hour for the first three months. That was shy of Costco’s starting hourly wage of 1,500 yen but enough to entice job-seekers in the notoriously tight labor market. After three months, wages would be at 1,050 yen, versus 970 yen pre-Costco.

Pressure from the big-box U.S. retailer to offer competitive salaries is tough for businesses like Yamada-udon, but could be the kind of jolt that Japan’s local economies need to create a virtuous cycle of higher wages, solid consumption and stable demand-driven inflation, some say.

A meaningful and sustainable rise in wages is a key goal for Prime Minister Fumio Kishida, while the Bank of Japan says it’s a crucial factor for normalizing monetary policy. Real wages — stripping out the effect of inflation — have fallen for 25 straight months despite Japanese firms agreeing to the biggest hike in wages in three decades in both 2023 and 2024.

That has dragged down consumption and the broader economy, which depends heavily upon it, making it harder for the BOJ to execute a smooth exit from easy policy.

Japan lags far behind other big economies with an index for its real average annual wages showing almost no growth between 1995 and 2021, according to IMF data. That compares with growth rates of 50% in the U.S. and nearly 30% in France during the same period.

Two years ago, Costco set its minimum hourly pay at 1,500 yen across all of its stores in Japan in a bid to retain workers. That’s high even for Tokyo, where the legal minimum wage is the country’s highest, at 1,113 yen, and 60% more than the minimum in Gunma prefecture. Costco received more than 2,000 applications for about 300 spots for its Meiwa store which opened in April 2023 about an hour north of Tokyo.

“If we offer higher wages, our staff can earn and spend more,” said Costco Gunma Meiwa warehouse manager Kaoru Yamamoto. “By doing so, we feel we can make a big contribution by creating a favorable cycle in the local economy.”

Costco plans to accelerate its new-store openings in Japan, nearly doubling the number of outlets to more than 60 by 2030, many in remote regions such as Shiga and Okinawa prefectures.

Swedish furniture maker IKEA, which has set a nationwide minimum hourly wage of 1,300 yen in Japan, also opened a store in Gunma this year.

“Such moves by big foreign firms to offer higher wages can become a trigger for wage hikes in the local community, which can spread into the broader economy,” said Yusuke Aoki, an economist at Indeed Hiring Lab.

STEPPING RIGHT UP

Just over a year since Costco opened in his town, Meiwa mayor Motosuke Tomizuka says the positive signs are already evident.

The hourly wage in Meiwa has grown by as much as 300 yen, he said, and the rice-growing town of about 11,000 residents sees about as many daily visitors thanks to Costco’s popularity.

“When the local economy enters the stage of raising wages, what do business owners do? They try their hardest to make money,” Tomizuka said. “In this way, the economy finally expands and spurs revitalization.”

Costco worker Ryu Kawane says the company’s generous pay has allowed him to buy higher-quality ingredients to make his favorite dish of roast beef, while colleague Nanami Shimamura said he’s now able to save up to study abroad.

Noodle chain Yamada-udon, for its part, said it has Costco to thank for the influx of shoppers into town, contributing to a 40-50% jump in its revenues.

To be sure, not everyone was thrilled about Costco’s arrival, mayor Tomizuka said, recalling how some business owners chided him for making it even more difficult to hire.

“The big chains may have the strength to raise wages, but small and medium-sized businesses are still in a difficult position,” said Hisanori Amada, an economist at the Gunma Labour Bureau.

“Some can’t even afford to offer jobs at the moment.” ($1 = 157.1100 yen)