Japan base wages jump the most since 1993 after large pay deals

TOKYO – Japanese workers’ base salaries have risen the most since 1993, a jump that supports the case for the Bank of Japan (BOJ) to consider raising interest rates even as real wages continue to fall.

Base pay increased 2.5 per cent in May from a year ago, the fastest growth since 1993, outpacing the 1.9 per cent gain in the headline figure, the Labour Ministry reported on July 8.

A more stable measure for full-time workers that avoids sampling issues and excludes bonuses and overtime pay rose by a record 2.7 per cent, a firmer sign of improvement in the overall wage trend.

The data comes after the nation’s biggest umbrella group for unions said it has secured an average wage increase of 5.1 per cent for its workers in 2024, the biggest gain since 1991.

The figures may bolster confidence in the view that a virtuous circle is emerging of wage and consumption growth that generates demand-led inflation. This is a dynamic that will support moves by the BOJ to further normalise policy, including the possibility of raising rates as soon as July, after it hiked them in March for the first time in 17 years.

The yen was largely unmoved after the report, an indication that investors did not see the array of figures as a game-changer for the central bank.

One in three economists surveyed by Bloomberg in June saw the bank hiking rates at its board meeting concluding on July 31, when the authorities are also set to unveil plans to reduce bond purchases and update their economic outlook.

So far, the evidence on pay increases boosting consumption is mixed. A gauge of household spending released last week showed that expenditures fell unexpectedly in May by 1.8 per cent versus the same period a year earlier. Other figures showed that retail sales growth picked up to a pace that beat consensus estimates that same month.

Inflation continues to

pressure household budgets.

The July 8 figures showed that real cash earnings fell 1.4 per cent, sliding for a 26th consecutive month. The country’s key price indicator rose 2.6 per cent in May, remaining at or above the BOJ’s 2 per cent target for over two years. Persistent weakness in the yen has heightened fears that cost-push inflation may further squeeze consumers.

The headline cash earnings figure for May came in weaker than a forecast 2.1 per cent, though the report showed the result was dragged down by falling bonus payments. Bonuses and overtime pay mask the overall trend.

Finance Minister Shunichi Suzuki said on July 5 that inflation remains a concern despite the significant pay increases of late, adding that recent price increases have partly been driven by higher energy prices and the weak currency.

Still, the uptick in base pay supports the case for some optimism. Many households received one-off tax rebates in June, and there may be more upside for pay trends.

Wage increases take time to show up in pay packets, according to Morgan Stanley. In 2023, fewer than half the firms that pledged wage gains in spring negotiations had administered those increases by May, the bank said.

Tightness in the labour market is expected to help maintain upward pressure on wages. The BOJ’s latest Tankan survey showed that businesses are increasingly facing labour shortages, particularly among non-manufacturers, which experienced the worst manpower constraints in more than 30 years.

The BOJ has said it expects private consumption to recover after four quarters of decline, potentially underpinning an economic recovery.

Prime Minister Fumio Kishida is also looking for signs of resilient spending as he hopes to restore his support ahead of a party leadership contest in September and a potential general election.

To mitigate the impact of inflation on households, Mr Kishida had said in June that he will reintroduce utility subsidies starting in August. BLOOMBERG