TOKYO — The Japanese government and the ruling coalition have decided to block investment tax credits for large companies that decline to raise worker pay.

Companies that do not raise the wages of long-term employees by at least 1% from year-before levels will not receive credits that let them deduct part of their investment in areas such as research and development spending from their tax bills. The government plans to offer tax incentives to enterprises that lift employee pay, while piling pressure on those that are slow to act.

The measure will be included in the ruling coalition’s tax reform plan for fiscal 2022. At present, large companies are eligible for the tax credits as long as the total amount of wages for long-term employees rises versus the previous business year, regardless of the size of the increase.

The change means credits will not be given unless companies raise wages by at least 0.5% in fiscal 2022. The minimum increase will be raised to 1%, starting in fiscal 2023. Businesses with capital of more than 1 billion yen ($8.8 million) and 1,000 employees that show a net profit the previous business year will be subject to the new rule.

The rule will also apply to tax credits for investment in R&D, measures to achieve digital transformation and carbon neutrality, and those aimed at developing 5G wireless network infrastructure.

The government and the ruling coalition have been considering phased corporate tax incentives, based on employers’ degree of commitment to wage hikes and training. Some members of the coalition requested tough measures against companies that fail to raise wages.

Prime Minister Fumio Kishida considers wage hikes key to his effort to create a “virtuous cycle of growth and distribution” of wealth. The government will take a carrot-and-stick approach to persuade businesses to raise wages.

To ensure continuous pay hikes, the government will set exceptionally high tax deduction rates. Big companies will be able to deduct up to 30% of the increase in wages from their corporate tax, while small and midsize enterprises will be eligible for deductions of up to 40%. Large companies will be eligible if they raise total wages for long-term employees by at least 3%. Smaller companies will need to achieve pay hikes of at least 1.5% for their staff, including new hires.

Large enterprises will also be required to announce a commitment to pass on profits to employees on their websites. The government hopes that having companies publicize their pledges to increase pay and invest in human resources will help generate momentum for higher pay.