Japan’s Base Pay Hits Record High Since 1993

The news follows the largest union umbrella organisation in Japan announcing that it has negotiated the largest salary raise for its employees since 1991 – a 5.1% average increase this year.

Base pay for Japanese workers increased by the highest amount since 1993, which is a positive indication that the underlying pay trend would begin to boost consumption and allow the Bank of Japan to hike interest rates once more.

According to labor ministry data released on Monday, base pay grew 2.5% in May over the previous year, the quickest growth since 1993, surpassing the 1.9% climb in the headline number.

A better indicator of progress in the overall wage trend, a more stable metric for full-time employees that avoids sampling problems and does not include bonuses or overtime pay increases by a record 2.7%.

The news follows the largest union umbrella organisation in the country announcing that it has negotiated the largest salary raise for its employees since 1991 – a 5.1% average increase this year.

The data released on Monday might increase confidence in the theory that a positive cycle of rising wages and consumption is beginning to emerge, leading to demand-driven inflation. This dynamic would provide support to the Bank of Japan’s efforts to further normalize policy, including the potential rate hike this month following its first rate increase in 17 years in March.

Notwithstanding, many see reasons for the central bank to maintain caution as wage rises continue to underperform inflation and as consumer expenditure continues to contract.

The influence of this outcome on the central bank’s decision would be minimal because the BOJ will not rely just on data from a single month, according to Daiwa Securities head economist Toru Suehiro. The weak private consumption data should be constantly monitored, which makes a rate hike in July challenging.

Following the data, the yen did not alter much, suggesting that investors did not view the range of numbers as a game-changer for the central bank. The headline figure was weaker than predicted, but declining bonus payouts helped to bring it down, which complicated the picture.

When the bank meets as a board until July 31, when officials are expected to announce plans to scale back bond purchases and revise their prognosis on the economy, one in three economists polled by Bloomberg last month predicts that the bank will raise rates.

There is currently conflicting evidence regarding wage growth and consumption. According to a measure of household spending that was made public last week, May expenditures surprisingly decreased by 1.8% as compared to the same month the previous year. Additional data revealed that in the same month, retail sales growth accelerated to a rate that was above consensus projections.

The strain of inflation on household budgets persists. According to data released on Monday, actual cash earnings decreased 1.4% for the 26^th straight month. For more than two years, the nation’s primary price indicator has increased by 2.6% in May, staying at or over the BOJ’s 2% objective. Concerns that cost-push inflation may put greater pressure on consumers have increased due to the yen’s ongoing depreciation.

Additionally, in an effort to win back support before a probable general election and a party leadership battle in September, Prime Minister Fumio Kishida is keeping an eye out for indications of resilient spending. In an attempt to lessen the impact of inflation on households, the premier said last month that utility subsidies would be reinstated, with effect from August.

Kishida was somewhat relieved by Yuriko Koike’s victory against opposition parties in Sunday’s Tokyo governor’s race. However, the fact that his ruling party was unable to get more than two of the nine municipal council seats up for grabs in the city indicates that Kishida’s popularity is still quite low.

Despite recent large salary raises, Finance Minister Shunichi Suzuki stated on Friday that inflation is still a concern. He also mentioned that recent price hikes have been influenced by the weak currency and rising energy costs.

Nevertheless, there is cause for some optimism given the increase in base salary. June saw a large number of households receive one-time tax refunds, and wage trends could still improve.

Pay packets do not immediately reflect wage increases, according to Morgan Stanley. Less than half of the companies who promised salary hikes during the spring discussions in 2023 implemented those increases by May, according to the bank.

According to Suehiro, base pay for full-time employees will probably reach 3% in July after the yearly wage increases are more thoroughly reflected in the data. He anticipates that the current electricity subsidies will help real wages become positive in the third quarter.

It is anticipated that labor market tightness will support further wage pressure higher. According to the most recent Tankan survey conducted by the BOJ, businesses are experiencing a growing labor scarcity, especially in the non-manufacturing sector, which is experiencing its worst manpower shortfall in over three decades.

After four quarters of declines, the BOJ has stated that it expects private consumption to rebound, which might support an economic recovery. Suehiro said that if the BOJ’s data is accurate, there will be an increase in September or October.