(Bloomberg) — Japanese workers’ base salaries saw the largest increase in over three decades, supporting the Bank of Japan’s view that the economy remains on the recovery track and backing the case for a rate hike in coming months.
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The pace of gains in base pay quickened to 2.6% year on year in September versus a 2.4% clip in August, the labor ministry reported Thursday. The advance was the strongest in over 31 years.
Nominal cash earnings increased by 2.8%, missing the consensus estimate of 3%, while a more stable measure of wage trends that excludes bonuses and overtime and avoids sampling issues registered 2.9% growth for full-time workers, accelerating a tad from the previous month’s 2.8%.
In a less favorable development, real wages fell for a second straight month even as price gains slowed in September after the government resumed subsidies to reduce household gas and electricity bills.
Taken together, Thursday’s data show that wage hike momentum remains largely steady despite pockets of weakness, sending a positive signal to authorities hoping to see a cycle in which rising wages fuel spending and spur demand-led inflation. While the central bank 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, pointing to the possibility of another rate hike further down the road.
“There’s no doubt that wages are improving,” said Atsushi Takeda, chief economist at Itochu Research Institute. “The trend is improving as expected toward another rate hike.”
Nearly half of economists surveyed last month by Bloomberg said they expect the bank to raise the benchmark rate in December, while another 32% predicted the move would come in January.
What Bloomberg Economics Says…
“The data support our view that the BOJ will raise rates further in January, when it will have seen more evidence that the US economy is making a soft landing and will probably be encouraged by signs the domestic wage-price cycle continues to build momentum.”
— Taro Kimura, economist
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Prime Minister Shigeru Ishiba is watching wage trends closely, as he’s made growth in real wages a key issue on his agenda. To achieve that goal, the premier has ordered the compilation of an economic stimulus package that is expected to include measures to mitigate the impact of rising prices on household budgets as well as support for small and medium-sized companies that raise salaries.
The future of wage growth will depend on the outcome of the next round of annual negotiations between unions and corporate employers, which kicked off a month ago. Japan’s largest labor union group Rengo said it will seek gains of at least 5% in the talks, maintaining the same goal it set for the current fiscal year. The group ultimately secured an average salary gain of 5.1% this year, the largest increase in over 30 years.
Wage increases for workers at small and medium firms and for part-time workers may play a crucial role in determining whether momentum holds, according to Rengo’s chair Tomoko Yoshino.
Following Rengo’s lead, another broad labor union is seeking even bigger increases in coming negotiations. UA Zensen, which is predominantly comprised of workers at smaller companies, announced 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 stood pat on policy on Oct. 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 won’t base any rate decisions solely on the results of wage talks, but he’s also said 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 helped weaken the yen, raising 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. He added that the BOJ could raise interest rates as soon 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, which will indicate whether the recovery in consumption continued.
Thursday’s wage data partly reflect continuing 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 continued tightening of labor market conditions may keep underpinning employee incomes.
