Japan's basic wage growth has reached a 32-year high, supporting the continued rate hikes by the Bank of Japan.

The basic wages of Japanese workers are rising at the fastest pace in 32 years, supporting further interest rate hikes by the Bank of Japan. Japan's Ministry of Health, Labour and Welfare announced on Monday that basic wages rose by 3.1% in January compared to a year ago, the largest increase since October 1992. In addition, a more stable wage trend indicator showed that wages for full-time workers increased by 3%, exceeding this threshold for the first time since July last year. In January, the nominal cash income growth rate slowed to 2.8%, below market expectations of 3%. This highlights the impact of rising prices, with real cash income dropping by 1.8%, the largest decline since March 2024, economists had expected a decrease of 1.6%. Overall, these data suggest that despite the impact of continued inflation on workers' household budgets, the trend in basic wages remains stable. Therefore, these data may lead the Bank of Japan to continue gradually raising interest rates. Naoki Hattori, senior economist at Mizuho Research Institute, stated, "The Bank of Japan will confirm with today's data that the wage trend is on track, so there is no need for the bank to change its view on monetary policy. In other words, today's data will not be a reason to accelerate or delay the next interest rate hike." These data are released as annual wage negotiations between Japanese labor unions and employers are expected to reach a climax later this week, when preliminary results of this year's agreements will be reached. Last week, Japan's largest labor union organization, Rengo, demanded the largest pay raise since 1993 by Japanese workers, indicating that worker confidence remains strong after achieving the largest pay raise in over 30 years during negotiations last year. Workers' demands for raises also reflect their impatience with rising living costs. With fresh food prices rising at the fastest pace in 20 years, Japan's consumer prices in January exceeded expectations, with overall inflation reaching 4%. In January, the Bank of Japan raised its benchmark interest rate to 0.5%, and it is widely expected to keep rates unchanged at its meeting next week. The general consensus in the market is that the next rate hike will take place in the summer, with some economists hinting that it could potentially happen as early as May 1. Bank of Japan Governor Haruhiko Kuroda and other board members have reiterated that if the outlook on prices becomes a reality, the bank will continue to raise interest rates. The question is whether potential wage increases will stimulate consumer demand. Data expected to be released on Tuesday will show a 3.7% increase in household spending in January, the largest increase since August 2022. How to mitigate the impact of rising prices is a key task for current Japanese Prime Minister Fumio Kishida. The Liberal Democratic Party performed poorly in a public opinion poll in October last year, weakening his position. The party will face a national election challenge this summer. Hattori said, "From now on, how much real wages increase will directly affect individuals' feelings in their daily lives, and subsequently influence their confidence and support for politics." So far, the Japanese government has implemented several measures to alleviate prices, including releasing emergency rice reserves after soaring food prices. The government has also decided to raise the threshold for the lowest tax-exempt income from 1.03 million yen to 1.6 million yen ($10,800) to increase disposable income.