Japan real wages unexpectedly rise, keeping Bank of Japan on hike path
JAPANESE workers’ real wages rose for a second consecutive month, keeping the central bank on track for another potential rate hike later this year.
Real cash earnings for workers climbed 0.4 per cent in July from a year earlier, the labour ministry reported on Thursday (Sep 5). While the pace of gains slowed from the previous month’s increase, the result beat the consensus call for a 0.6 per cent decline and followed the first advance in 27 months in June. Nominal wages grew 3.6 per cent, also outpacing the consensus estimate.
The yen strengthened to as strong as 143.19 against the US dollar following the data release, taking gains to as much as 0.4 per cent for the day.
Base salaries experienced strong growth, rising 2.7 per cent, the largest gain in 31 years. A more stable measure of wage trends that avoids sampling problems and excludes bonuses and overtime showed wages for full-time workers increased by a record 3 per cent.
Thursday’s data are an indication that a key peg of the virtuous cycle long sought by Bank of Japan (BOJ) governor Kazuo Ueda may be falling into place. The BOJ has said it expects wage gains to fuel demand-led inflation, a condition it needs to confirm as it continues along the path towards normalising policy after maintaining ultra-easy settings for decades.
“Ueda’s comments indicate that he still wants to raise interest rates,” said Masato Koike, an economist at Sompo Institute Plus. “Assuming no further market turmoil, and given that wage growth will provide significant support, the likelihood of a rate hike before the end of the year has increased considerably.”
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Almost all economists expect the BOJ to stand pat when the board next sets policy on Sep 20. Most expect a move sometime between October and January after the BOJ conducted its second rate hike this year on Jul 31.
Ueda has said the bank would consider additional tightening steps if the economy and prices develop in line with the bank’s projections.
The gain in real wages will create a positive backdrop as the ruling Liberal Democratic Party (LDP) chooses a new leader. Given its dominance in parliament, the LDP’s Sep 27 election is all but certain to determine the nation’s next premier after Prime Minister Fumio Kishida announced his decision to step down. Kishida resigned after persistently low approval ratings that partly reflected voter dissatisfaction over the failure of wages to keep up with rising prices.
Thursday’s strong data were driven largely by the historic wage gains that resulted from annual wage negotiations between the nation’s largest umbrella group for unions and employers. The union group, Rengo, secured wage increases of more than 5 per cent for its constituents, the largest gains in more than 30 years. The BOJ has said in the past that over 80 per cent of wage increases agreed for a new fiscal year tend to be reflected in data by July.
Japan’s chronic labour shortage is likely to keep upward pressure on wages, the BOJ said in its latest Outlook for Economic Activity and Prices. Japan’s large service sector firms are facing the worst manpower constraints in 32 years, according to the BOJ’s June Tankan report.
Companies have reported relatively robust results in the latest quarter, suggesting they have some leeway to keep rewarding workers. Some 64 per cent of companies in the Topix index beat earnings expectations in the latest quarter, while 33 per cent missed, a better ratio than the previous period, according to Bloomberg-compiled data.
While inflation remains at a relatively high level, having hit or hovered above the BOJ’s 2 per cent target for more than two years, there are also signs of improving consumer sentiment. Consumption turned positive for the first time in five quarters in the April to June period, partly supported by recent wage gains and the government’s tax rebate initiative.
Revised gross domestic product figures incorporating the latest data will be released on Monday. BLOOMBERG
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