A Japanese 10,000-yen banknote arranged in Kyoto, Japan, on Thursday, Nov. 2, 2023.
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Real wages in Japan fell for a 23rd straight month, suggesting that high inflation is still biting into consumer spending power in the country.
Labor ministry data released Monday showed that real wages fell 1.3% in February from a year ago, accelerating from a revised 1.1% drop in January.
On a nominal basis, however, wages rose 1.8%, with the base pay component climbing 2.2%. The data showed special payments, which include bonuses, slipped 5.5% year-on-year.
The data comes after Japan’s unions secured the highest wage increases in 33 years. But those pay hikes benefit only a fraction of Japan’s workers, given only 16.3% of workers are unionized in the country and most unionized workers are concentrated in large companies.
That suggests any “virtuous cycle” between wages and prices could be limited as workers in small and medium enterprises face higher prices amid stagnant wages.
Inflation has surpassed the Bank of Japan’s 2% target every month since April 2022. If real wages continue to decline, consumers may choose to save instead of spend, thereby generating little demand and impetus for prices to rise.
No return to NIRP and YCC
Pay increases for union workers could trickle down and broaden, Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation and head of its research group, told CNBC. He noted this year’s “wage hikes have also been relatively strong, and appear to be in line with the Bank of Japan’s virtuous cycle.”
Suzuki said the latest figures from the Japanese Trade Union Confederation, also known as Rengo, estimate a 3.2% nominal wage growth for SMEs, not far off the 3.7% for large enterprises.
The Bank of Japan’s regional economic assessments for April also indicated that the employment and income situation in eight out of Japan’s nine regions has been “improving moderately.”
Even if real wages do not rise, Suzuki said it is unlikely the BOJ will revive its negative interest rate or and yield curve control policies because the current inflation environment is different from the past.
Moving forward, Suzuki said the indicators investors should monitor include inflation, wage and consumption data, especially in June and July.
Almost every Japanese company’s financial year starts on April 1. As a result, it tends to be a date for major announcements, including wage hikes.
Economists will monitor whether the increases actually translate into higher real wages and boost consumption. The monthly wage report is one of the key considerations when the Bank of Japan formulates monetary policy.
When the BOJ ended its negative interest rate policy last month and abolished its yield curve control policy, the central bank said “recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid.”
The BOJ also predicted its 2% “price stability target” would be achieved in a sustainable and stable manner toward the end of 2024.
As such, Suzuki expects the Bank of Japan will wait until the beginning of autumn before it makes any further changes to its monetary policy. SMBC forecasts the next rate hike will come in October.
