(Feb 5): Japanese nominal wages rose at the fastest pace in nearly three decades, supporting the Bank of Japan’s (BOJ) latest rate hike decision and keeping it on track for further tightening steps.
Nominal cash earnings for workers climbed 4.8% in December from a year earlier, up from a revised 3.9% gain in November, the labour ministry said Wednesday. The reading exceeded economists’ consensus forecast and marked the largest jump since 1997. The strong gain was driven by a jump in bonuses.
The yen strengthened as much as 0.8% to 153.17 versus the dollar, leading gains among Group-of-10 currencies. Yields on Japanese government debt rose.
“Bonds were sold off heavily due to the wage data, as the market is speculating that the BOJ rate hikes will continue or be brought forward,” said Naoya Hasegawa, chief bond strategist at Okasan Securities.
In another positive development for pay, real wages grew for a second consecutive month in December. Economists had expected real wages to fall amid accelerating inflation. Overall inflation in the country has been above 2% for nearly three years, hitting 3.6% in December.
Wage trends continue to face market scrutiny even after the BOJ’s latest decision to raise borrowing costs, as they could influence the timeline of future rate hikes. Last month the central bank implemented its third rate increase in less than a year, after evaluating wage growth and the initial market reaction to Donald Trump’s return to the White House.
“Wage trends will of course remain a key indicator for the BOJ’s policy decisions,” said Masato Koike, senior economist at Sompo Institute Plus. “The trend so far looks on track, but it’s unlikely that base pay will see further gains until the spring negotiations,” he said, adding that the bank’s focus is on how the spring pay talks unfold.
Swaps market pricing for the likelihood of a rate hike by the BOJ’s July meeting increased to about 78% on Wednesday.
At the post-decision press conference in January, Governor Kazuo Ueda signaled the possibility of additional rate hikes, noting that the country’s interest rates still remain below the neutral level. Ueda emphasised the need to monitor economic conditions before making the next move, reminding the market of the importance of keeping an eye on pay developments.
In Wednesday’s data, a more stable measure of wage trends that avoids sampling distortions showed that full-time workers’ base pay rose 2.8%, maintaining growth above 2% for more than a year.
Most BOJ watchers anticipate another tightening step in roughly six months, with July emerging as the most popular timing, according to a Bloomberg survey published last week following the January meeting.
Looking ahead, the market is closely watching wage negotiations set to culminate in March to assess the sustainability of wage growth. So far, the talks appear to be progressing solidly, with some large companies, including Asahi Breweries Ltd and Aeon Co, reportedly pledging to offer some workers salary increases exceeding 7%.
Japan’s largest trade union leader has also been meeting frequently with business representatives to push for higher wages, emphasising their goal of 5% for overall pay gains, and a slightly higher 6% target for smaller firms.
For real wages to see sustained gains, a key concern remains inflation, and ongoing yen weakness which is driving up import prices. Japan’s prices have risen at or above the BOJ’s 2% inflation target for nearly three years, weighing on consumer sentiment.
The yen remains more than 3% lower versus the dollar than this time last year and it is likely to stay under pressure for some time, as US Federal Reserve officials are increasingly signaling a potential delay in rate cuts amid Trump-driven uncertainties. Additionally, a wave of tariff-related announcements has heightened inflation risks in the US, which could further weaken the yen.
Slow real wages have already made many households cautious about spending, a source of concern not only for the BOJ, but also for Prime Minister Shigeru Ishiba’s government. Ishiba’s administration is aiming to shore up consumption through measures in the ¥21.9 trillion (US$141 billion or RM635.11 billion) stimulus package, including utility subsidies and cash handouts for low-income households.
Japan’s latest consumption trend is set to be shown in upcoming data, including household spending data due Friday. The gross domestic product figure for the final three months of last year will also be released later this month, with economists expecting a slowdown in private consumption.
“The upward wage trend has not fed into consumption, largely due to real wages growth not clearly increasing,” said Sompo’s Koike. “If real wages stably grow as inflation slows down towards the middle of the year, there is a possibility that private spending will recover from that point.”
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