Japanese workers experienced their most substantial base salary increase in over three decades, strengthening the Bank of Japan’s (BOJ) position that the nation’s economy remains on a recovery track. This momentum has prompted further speculation that the BOJ may increase interest rates in the coming months, marking a notable shift in Japan’s economic trajectory.
According to the Japanese Ministry of Labor’s report released Thursday, the pace of base pay gains surged by 2.6% year-on-year in September, up from 2.4% in August. This marks the highest rate of wage growth in over 31 years. Despite these gains, real wages adjusted for inflation have fallen, illustrating Japan’s continued struggle with cost-of-living pressures even as nominal incomes rise. The combination of wage growth and inflation data presents a complex picture for policymakers aiming to drive sustainable inflation through demand-led consumer spending, a crucial goal for the BOJ.
September’s 2.6% year-on-year increase in base pay growth underscores the robustness of wage momentum in Japan. However, nominal cash earnings, which account for a broader set of earnings metrics, increased by only 2.8%—slightly below the anticipated 3%. Excluding bonuses and overtime pay, a measure that provides a stable view of core wage trends, earnings for full-time workers rose by 2.9%, indicating a marginal improvement from August’s 2.8%.
This level of wage growth reflects a tight labor market and rising demand for skilled labor. The report also highlights that Japan’s unemployment rate fell to 2.4% in September, its lowest since January. The job-to-applicant ratio increased further, signaling continued demand for labor and possible upward pressure on wages in the near term.
Despite improvements in nominal wage growth, real wages in Japan declined for the second consecutive month as inflation remains a challenge. This drop reflects the difficulty many Japanese households face, with price increases outpacing income gains. Government efforts to ease household cost burdens, such as subsidies to lower gas and electricity bills, have had limited success in countering the impact of rising costs on purchasing power.
The contrast between wage growth and real wages exposes a key tension in the BOJ’s strategy. While rising nominal wages suggest an economic upswing, the decline in real wages underscores the need for policies to stabilize consumer prices without eroding purchasing power. This challenge places additional pressure on the BOJ as it deliberates future rate adjustments.
BOJ Governor Kazuo Ueda has remained optimistic about Japan’s economic recovery and its potential to achieve sustained inflationary growth. At the recent BOJ policy meeting, the central bank maintained its current rates but reiterated its commitment to a gradual increase if conditions allow. Speaking to the media following the decision, Ueda noted that wage growth in 2023 was an essential consideration in the BOJ’s decision to end its negative interest rate policy earlier this year.
Economists and market analysts have begun speculating about the timing of the next rate hike. Nearly half of economists surveyed by Bloomberg last month expect the BOJ to raise the benchmark rate as soon as December, while others anticipate the move might occur in January. Analysts cite strong labor market data and improving wage dynamics as key indicators that the BOJ may soon have enough evidence to support a rate hike.
Atsushi Takeda, chief economist at Itochu Research Institute, echoed this sentiment, stating, “There’s no doubt that wages are improving. The trend is advancing as expected toward another rate hike.” He added that the current economic indicators align with the BOJ’s strategy of fostering a wage-driven, demand-led inflationary environment.
Prime Minister Shigeru Ishiba has made wage growth a central focus of his economic agenda, with an emphasis on boosting real wages to alleviate the financial burden on Japanese households. To address these challenges, Ishiba has ordered the development of a comprehensive economic stimulus package that will aim to mitigate rising costs and support small and medium-sized businesses in raising wages.
The stimulus package is expected to include subsidies, tax breaks, and other measures aimed at stimulating wage growth across various sectors, particularly for small and medium-sized enterprises (SMEs) that may struggle to keep up with rising wage demands. The government’s support is seen as crucial, especially for smaller companies that form the backbone of Japan’s economy and employ a significant portion of the labor force.
The trajectory of wage growth in Japan will largely depend on the outcome of ongoing annual wage negotiations between unions and corporate employers. The Japanese Trade Union Confederation, Rengo, the nation’s largest labor union group, has set a target of a 5% wage increase in its negotiations, maintaining its ambitious stance from the previous fiscal year. Rengo achieved a 5.1% average wage gain for workers this year, marking the largest increase in over 30 years.
Tomoko Yoshino, Rengo’s chair, emphasized the importance of wage increases at smaller firms and for part-time workers, noting that these segments play a critical role in sustaining wage growth across the economy. In a move that could further bolster wage momentum, UA Zensen, another influential labor union representing employees at smaller companies, announced its intention to seek a 6% wage increase for regular workers and a 7% increase for part-time workers in the upcoming negotiations.
External economic factors are also influencing Japan’s inflation and wage dynamics. The yen’s recent depreciation, partially driven by global currency shifts following the US presidential election, has exacerbated inflationary pressures by raising the cost of imports. The weakened yen has increased the cost of essential goods, adding to the inflationary pressures that the BOJ is closely monitoring.
According to Saisuke Sakai, senior economist at Mizuho Research & Technologies, the BOJ may be inclined to raise interest rates sooner if the yen’s decline continues to stoke inflation. “The BOJ is increasingly focused on currency fluctuations rather than solely on domestic economic indicators,” Sakai said, suggesting that the BOJ could consider a rate increase in December if the yen’s decline continues to elevate inflation risks.
The impact of import-driven inflation could affect consumer sentiment, especially as private consumption showed signs of recovery in the second quarter after a five-quarter decline. Gross Domestic Product (GDP) figures for the summer quarter are expected next week, and analysts will closely examine these data to assess whether consumer spending has sustained its upward trend amid ongoing inflation concerns.
The BOJ’s quarterly outlook report recently emphasized that Japan’s tightening labor market conditions could continue to support wage increases, a critical factor in achieving the central bank’s inflation target. As Japan navigates the dual challenges of sustaining wage growth while managing inflation, the BOJ remains focused on ensuring that rising wages contribute to sustained economic expansion.
As the annual wage negotiations progress, union demands and government stimulus measures will play pivotal roles in shaping Japan’s economic outlook. The expectation is that robust wage increases in 2024, similar to the gains achieved this year, will bolster the BOJ’s confidence in raising interest rates further. By building a wage-led inflation cycle, Japan aims to foster a self-sustaining economic recovery that could reduce its reliance on external demand and currency-driven inflation.
