(March 14): Japan’s largest labour union group said its workers secured the highest pay deal in more than three decades, supporting the case for further gradual interest rate hikes from the Bank of Japan (BOJ).

Some 760 affiliated unions under the trade union federation Rengo have so far secured a pay gain of 5.46% on average in ongoing annual wage negotiations, according to its initial tally released on Friday. That’s the highest level since 1991 when compared with past final tally figures, and exceeded last year’s initial reading of 5.28%. The report also showed that base pay gains averaged 3.84%, growing faster than last year’s 3.7%.

The figures will be revised several times through the final tally in the summer to reflect more results, which are typically lower than the initial count.

Friday’s results indicate a steady wage growth trend, likely sparking market speculation that the BOJ may consider another rate hike sooner than later.

“These are impressive results,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute and former BOJ official. “The BOJ must be gaining confidence over the wage-inflation cycle. July is a likely timing for the next hike, but it’s now possible that the BOJ starts thinking about the June or May meeting as potential moments.”

Last year the BOJ raised interest rates for the first time in 17 years in March, a matter of days after Rengo published its first tally. Following a similar schedule, the BOJ is set to deliver its latest policy decision next week, five days after Rengo’s latest figures. All surveyed economists expect no policy change at the two-day meeting ending March 19.

While most BOJ watchers don’t expect another rate hike before summer, the spring wage talk results remain important in offering a hint of the timing of the next move. The strong results likely reinforce the bank’s confidence in the economy and support further tightening.

BOJ officials, including Deputy Governor Shinichi Uchida, have recently signalled that the benchmark interest rate remains on a gradual upward path, contingent on incoming economic data.

In its January outlook report, the BOJ projected a continued increase in employee income as labour market conditions remain tight.

Preliminary tallies released earlier this week ahead of Rengo’s report pointed to solid progress. UA Zensen’s member unions secured a pay increase that’s not too far from last year’s level on Thursday, with part-time workers in particular winning high wage gains.

The wage talks also have political implications for Prime Minister Shigeru Ishiba, as the outcome could influence public sentiment ahead of this summer’s upper house election. Friday’s encouraging result could help support voter confidence in sustained income growth, reversing some of the ill will over continued inflation.

Since Ishiba’s ruling coalition lost its lower house majority just a month after he took office in October, his government has struggled to pass key legislation, from budgets to annual tax reforms.

Yet achieving wage growth that outpaces inflation isn’t an easy task. Despite last year’s multi-decade-high wage hikes in pay talks, real wage growth remains patchy at best amid sticky inflation. The labour ministry’s annual data showed that real wages fell by 0.3% in 2024, extending the streak of declines to three years.

Japan’s overall inflation figure hit 4% in January, with the weak yen pushing up import costs and slowing the growth of disposable income. Higher living costs have weighed on consumers, as seen in the latest data showing that households spent much less than expected in January.

To address wage and price concerns, Ishiba has introduced a series of measures. Recent efforts include releasing emergency rice stockpiles to bring down the cost of the country’s staple food and raising the tax-free income threshold to ¥1.6 million (US$10,800 or RM59,717) from ¥1.03 million to boost disposable income.

For both Ishiba and the BOJ, solid domestic demand is essential as the global economy faces mounting uncertainty, largely due to US President Donald Trump’s trade policies. The US imposed additional tariffs of 25% on steel and aluminium on Wednesday and is preparing reciprocal tariffs on sectors including cars, pharmaceuticals and semiconductors as soon as April 2.

Japan’s economy is projected to suffer both direct and indirect hits from US protectionist measures, suggesting that the nation cannot rely much on external demand and need to strengthen domestic demand. Revised GDP data released earlier this week showed that Japan’s economy grew moderately in the final three months of last year driven by net exports, while private consumption remained sluggish.

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