The economy is still on the path to recovery, with Japan's basic wage seeing the largest increase in over 30 years.

The basic wage of Japanese workers has seen the largest increase in over 30 years, supporting the view of the Bank of Japan that the economy is still on track for recovery and providing reasons for a possible interest rate hike in the coming months. The Japanese Ministry of Health, Labor and Welfare reported on Thursday that the year-on-year growth rate of basic wages in September increased to 2.6%, up from 2.4% in August. This is the largest increase in 31 years. Nominal cash income increased by 2.8%, lower than the widespread expectation of 3%, while a more stable measure of wage trends (excluding bonuses and overtime pay to avoid sampling issues) showed that wages for full-time workers increased by 2.9%, slightly faster than the previous month's 2.8%. On the other hand, despite a slowdown in price growth in September, real wages continued to decline for the second consecutive month. The government had previously reinstated subsidies to reduce household gas and electricity bills. Overall, Thursday's data shows that despite signs of weakness, the momentum of wage growth remains stable, sending a positive signal to the government, which hopes to see wage increases driving spending, stimulating demand, and driving inflation. While the Bank of Japan kept interest rates unchanged at its policy meeting last week, Bank of Japan Governor Haruhiko Kuroda reiterated his view that Japan is on track to achieve its inflation target and hinted at a possible future rate hike. Atsushi Takeda, Chief Economist at Itochu Research Institute, said: "There is no doubt that wage levels are increasing. As expected, the trend towards further rate hikes is improving." Nearly half of the economists surveyed last month said they expect the Bank of Japan to raise the benchmark interest rate in December, with another 32% predicting it will happen in January next year. Taro Kimura, an economist at Bloomberg Economics, said: "These data support our view that the Bank of Japan will raise interest rates further in January next year, at which point it will see more evidence that the US economy is achieving a soft landing, and may be encouraged by signs of a continued domestic wage-price cycle forming momentum." Japanese Prime Minister Fumio Kishida is closely monitoring wage trends, making real wage growth a key issue on his agenda. To achieve this goal, Kishida has ordered the development of an economic stimulus plan, expected to include measures to mitigate the impact of rising prices on household budgets and support for small and medium-sized enterprises to increase wages. The future of wage growth will depend on the results of the next round of annual negotiations between labor unions and business owners that began a month ago. Japan's largest labor union federation, Rengo, has said it will seek a minimum increase of 5% in negotiations, maintaining the target set for this fiscal year unchanged. The organization ultimately ensured an average wage increase of 5.1% this year, the largest in over 30 years. Rengo Chairman Tomoko Yoshino said that wage increases for workers in small and medium-sized enterprises and part-time workers may play a key role in determining whether the growth momentum continues. Under Rengo's leadership, another broad union is seeking larger pay hikes in the upcoming negotiations. UA Zenzen, mainly composed of employees from small companies, announced on Wednesday that it would seek a 6% overall wage increase for regular employees and a 7% overall wage increase for part-time employees. After the Bank of Japan maintained interest rates unchanged in policy decisions on October 31, Kuroda said at a press conference after the decision that if next year's wage growth remains consistent with this year's results, it would generally benefit the economy. He noted that the Bank of Japan would not make rate decisions solely based on the results of wage negotiations, but also highlighted that this year's wage growth was a key factor in the bank's decision to end negative interest rate policy in March. Additionally, President Trump's victory in the US presidential election helped weaken the yen, increasing the risk of inflation. Saisuke Sakai, senior economist at Mizuho Research & Technology, said: "The Bank of Japan is more concerned about currency than domestic factors such as the economy and prices." He added that if pressure is put on the Bank of Japan due to a weakening yen, the Bank of Japan could potentially raise rates as early as December. After private spending increased for the first time in five quarters driven by imports, import-driven inflation may also suppress consumer confidence. Next week's release of Japan's domestic production data for the summer quarter ending in June will indicate whether the consumption recovery will continue. Thursday's wage data partly reflects the ongoing tightness in the Japanese labor market. In September, the ratio of job openings to job seekers increased, and the unemployment rate fell to 2.4%, the lowest level since January. The Bank of Japan stated in its latest quarterly outlook report that the continued tightening of the labor market conditions could further support employee incomes.