Japanese workers’ base pay increased by the largest margin since 1994, indicating that corporate commitments to raising wages are starting to have an impact. However, market players remain skeptical about the strength of this trend.
According to the labor ministry, base pay rose by 2.3% in April compared to the previous year, resulting in a 2.1% increase in nominal wages.
Despite these positive figures, wages continue to lag behind inflation. Market participants focused on the weaker-than-expected growth in cash wages, which is a more accurate measure of wage increases. As a result, the yen weakened against the dollar, reversing recent gains.
For economists, these results provide further evidence to the Bank of Japan that the desired cycle of rising wages leading to demand-driven price increases may be closer to becoming a reality. The central bank is waiting for stronger confirmation of this trend before considering another interest rate hike, following the first one in March 2007.
According to Masato Koike, an economist at Sompo Institute Plus, Ueda has suggested that there could be a change in policy if he is convinced of the trend. Koike explains that if there is an expectation of an increase in nominal wages driven by base pay, and inflation is seen to be stabilizing, the bank will be more inclined to take action, even if real wages remain negative.
The Bank of Japan (BOJ) is scheduled to meet next week to discuss policy decisions. In April, economists were mostly of the opinion that the bank would wait until October before considering raising rates. However, since then, there has been an increase in expectations for an earlier move, partly due to the ongoing weakness in the yen, which poses a threat to import price growth.
On Wednesday, the latest data began to reveal the outcomes of this year’s salary negotiations, which resulted in workers securing an average wage increase of over 5%. This marks the largest gain in three decades, according to the largest labor union federation’s analysis. The report indicates that salary growth was evident across various sectors, ranging from manufacturing to services.
Typically, the wage increases resulting from annual negotiations are gradually reflected in workers’ paychecks starting from April and continuing through the summer. According to a study by the Bank of Japan (BOJ), almost 40% of this fiscal year’s wage increase will be implemented by April, and this figure is expected to rise to 80% by July.
However, Japan’s wage figures have faced criticism for their inconsistency. Many analysts prefer to focus on a subset of the data that avoids sampling issues that have affected the headline numbers over the years.
A more stable measure of the trend, which avoids issues with sampling and excludes bonuses and overtime, showed a 2.1% increase in wages for full-time workers. However, a more volatile wage figure that includes the impact of overtime and bonus pay only rose by 1.7%, falling short of the forecasted 2.1%. This has given pessimists reason to doubt the strength of the trend and has led to a pushback against the recent gains in the yen.
As a result, the currency weakened to 155.42 against the dollar early on Wednesday, compared to 154.95 before the release of the data.
Hirofumi Suzuki, the chief FX strategist at Sumitomo Mitsui Banking Corp, commented, “As we saw significant strengthening of the yen yesterday, it’s easy for dollar buying to take place. The weaker same sample cash pay gains in the monthly data provided a selling point.”
Real wages have continued to decline for the 25th consecutive month, with a 0.7% drop in the latest period. This is largely due to slow wage growth in comparison to inflation. The country’s consumer price index has remained at or above the Bank of Japan’s 2% target for the past two years, making it challenging for wages to catch up.
The persistent weakness of the yen could further contribute to inflationary pressures, potentially delaying any improvement in real wages. Despite the government’s efforts to prop up the yen with a record ¥9.8 trillion ($62.9 billion) intervention in the market over the past month, the currency remains unstable, trading at levels approximately 10% weaker than a year ago.