Japan's Wage Growth Strengthens Case for BOJ Rate Hike

Japanese workers' base salaries saw their largest increase in over three decades in September, bolstering the Bank of Japan's (BOJ) view that the economy is on a recovery path and supporting the case for a rate hike in the coming months, reports Bloomberg.

The pace of gains in base pay accelerated to 2.6% year-on-year in September, up from 2.4% in August, according to the labor ministry. This marked the strongest advance in over 31 years.

While nominal cash earnings rose by 2.8%, missing the consensus estimate of 3%, a more stable measure of wage trends, excluding bonuses and overtime, registered 2.9% growth for full-time workers, a slight acceleration from the previous month's 2.8%.

Despite this positive trend, real wages fell for the second consecutive month, as price gains slowed in September, following the government's reinstatement of subsidies to reduce household gas and electricity bills.

Despite pockets of weakness, Thursday's data demonstrate that wage hike momentum remains largely steady, sending a positive signal to authorities hoping to see a cycle where rising wages fuel spending and spur demand-led inflation.

While the BOJ kept rates on hold at its policy meeting last week, Governor Kazuo Ueda reaffirmed his view that Japan is on track to meet its inflation target, hinting at the possibility of another rate hike in the future.

"There’s no doubt that wages are improving," said Atsushi Takeda, chief economist at Itochu Research Institute, to Bloomberg. "The trend is improving as expected toward another rate hike."

Nearly half of economists surveyed by Bloomberg last month predicted that the bank would raise the benchmark rate in December, while another 32% predicted the move would come in January.

Prime Minister Shigeru Ishiba has made growth in real wages a key priority, prompting him to order the compilation of an economic stimulus package that will include measures to mitigate the impact of rising prices on household budgets and support for small and medium-sized companies that raise salaries.

The future trajectory of wage growth will depend on the outcome of the next round of annual negotiations between unions and corporate employers, which began a month ago. Japan's largest labor union group, Rengo, has stated that it will seek wage gains of at least 5% in these talks, maintaining the same goal it set for the current fiscal year. This year, the group secured an average salary gain of 5.1%, the largest increase in over 30 years.

Following Rengo's lead, another broad labor union, UA Zensen, is seeking even larger increases in upcoming negotiations. UA Zensen, which primarily represents workers at smaller companies, announced on Wednesday that it will seek a standard bump of 6% in overall wages for regular workers and 7% for part-time workers.

After the BOJ held rates steady on October 31, Ueda said at his post-decision press conference that it would generally be beneficial for the economy if next year's wage increases remained on par with this year's results. He noted that the bank will not base any rate decisions solely on the results of wage talks, but he has also stated that this year's wage gains were a key factor in the bank's March decision to end its negative rate policy.

Donald Trump's victory in the US presidential election has contributed to yen weakness, increasing the risk of fueling inflation. "The BOJ is more focused on the currency rather than domestic factors, such as the economy and prices," said Saisuke Sakai, senior economist at Mizuho Research & Technologies, to Bloomberg. He added that the BOJ could raise interest rates as early as December if a weaker yen adds pressure on the central bank.

Import-driven inflation also risks dampening consumer sentiment after private spending rose for the first time in five quarters in the three months through June. The gross domestic figures for the summer quarter will be released next week, providing insight into whether the recovery in consumption continued.

Thursday's wage data partly reflect the ongoing tightness in Japan's labor market. In September, the job-to-applicant ratio rose, and the unemployment rate fell to 2.4%, the lowest since January. In its latest quarterly outlook report, the BOJ indicated that continued tightening of labor market conditions may continue to support employee incomes.