Unexpectedly, actual wages in Japan saw the largest drop since September 2023, but expectations for an interest rate hike by the central bank remain undisturbed.

As Japan's inflation continues to outpace wage growth, Japanese workers are experiencing the largest real wage decline since September 2023, presenting increasingly serious economic growth challenges for Japanese Prime Minister Shizo Abe ahead of the crucial selection elections in about two weeks. For the Abe government and the Bank of Japan, which are seeking to advance the rate hike process, the relatively positive news is that data released last Thursday by Japan's largest labor union group Rengo showed that Japanese companies have agreed to a 5.25% wage increase this year, the largest increase in 34 years. Amid the dual pressures of inflation and labor shortages, continuous wage increases have become a new normal that companies have to face. Data published by the Japanese Ministry of Health, Labor and Welfare on Monday showed that real wages in Japan fell by 2.9% year-on-year in May, while economists had previously expected a decrease of 1.7%. Nominal wages in Japan for the same period increased by only 1%, well below the level economists had estimated due to cuts in bonuses. Although the decline in real wages indicates that Japanese voters are feeling real pain ahead of the crucial Japan House of Councillors election on July 20, the steady growth in basic wages driven by inflation and labor shortages continues to provide a positive momentum for the Bank of Japan to consider further advancing the rate hike process. The unexpectedly sharp drop in real wages highlights Japan's strong inflationary expansion, adding pressure to a small ruling coalition before the House of Councillors election. With prices rising faster than Japanese wage increases, public dissatisfaction is increasing, leading the political circles to come up with more convincing relief measures for the masses. Takano Sosuke, senior economist at Itochu Comprehensive Research Institute, said, "In the current election campaign, candidates frequently cite the real wage data in this monthly report. Today's results show that the public is feeling immense pressure in terms of living costs - undoubtedly a disappointing outcome for Abe." Japan's core inflation rate in May was 3.7%, well above the Bank of Japan's target of 2% inflation. Rising prices for essentials such as food and services have been the main driver. With just two weeks until the polls, the Liberal Democratic Party led by Shizo Abe has promised to distribute around 20,000 yen (about $138) cash to each adult and introduce more measures to stimulate wage growth. However, the latest polls show that this one-time subsidy is not popular, with many voters leaning towards supporting the opposition party's proposal to reduce consumption tax. In terms of monetary policy, despite concerns about weak real wages, ongoing growth in nominal wages and basic wages, along with continue...