Wages achieve strongest growth in seven months! Probability of Bank of Japan hiking interest rates in October increases.

The latest statistics show that nominal wages for Japanese workers have increased at the fastest pace in seven months, while real wages have seen their first increase this year. These signs support the reason for the Bank of Japan to consider restarting the interest rate hike process in the coming months or even in October. The Ministry of Health, Labour and Welfare reported on Friday that nominal wages in Japan increased by 4.1% in July compared to the same period last year, significantly faster than the revised 3.1% in June. This reading exceeded economists' forecast of 3% growth and marked the largest increase since December of last year. Real cash income also saw its first year-on-year rise in seven months, growing by 0.5%, better than the market's expected decrease of 0.6%. Base wages rose by 2.5%; a more stable indicator (which excludes bonuses and overtime pay to avoid sampling issues) showed that salaries for regular employees increased by 2.4%. The data released on Friday indicates that wage growth momentum is continuing. Japan's largest labor federation has secured wage increases of over 5% from Japanese employers for the second consecutive year. This year's wage increase secured by Japan's largest union is the largest in 34 years and has already been largely reflected in compensation. "The results of this survey indicate that the domestic economy in Japan is at least positive," said Nomura Securities' chief market economist Kohei Otsuka. "This strengthens people's confidence that even if there are some external shocks in the future, domestic demand will remain robust." This data will reinforce market expectations for the Bank of Japan to raise its benchmark interest rate again this year. Economists widely expect the Bank of Japan to maintain its interest rate at the next policy meeting on September 19, but many economists believe that an interest rate hike of 25 basis points could happen as early as October. For the Japanese government bond market, the rising expectations for a rate hike could trigger a continued massive sell-off of Japanese government bonds, leading to a sustained surge in long-term (10 years and above) Japanese government bond yields. Since the beginning of this year, with the Bank of Japan significantly reducing its large-scale bond buying program, and combined with global investors' concerns about Japan's massive government spending and the Bank of Japan possibly restarting interest rate hikes soon, Japanese long-term government bond yields have been pushed to multi-year highs. If unexpectedly strong economic data continues to catalyze expectations of a rate hike, some strategists are beginning to worry that a Japanese government bond "selling storm" could once again spread to global financial markets, causing turbulence in global stocks and bonds. Bank of Japan Deputy Governor Masayoshi Amamiya reiterated the central bank's established monetary policy path of raising the benchmark interest rate when conditions allow, while avoiding any indication of when an interest rate hike might occur. Overnight index futures indicate that traders are betting on a slightly over 70% probability that the Bank of Japan will resume its interest rate hikes before the end of the year, highlighting that most traders are betting that the Bank of Japan is on the verge of restarting its interest rate hike cycle. "These data are basically in line with our judgment that the Bank of Japan will raise interest rates by 25 basis points in October. However, given the cautious sentiment of delaying the rate hike due to higher U.S. government tariffs potentially dragging down Japan's export-driven economic growth, there remains a risk of postponing the rate hike action for a while," said Bloomberg Economics senior economist Taro Kimura. Bank of Japan Governor Haruhiko Kuroda reiterated on Wednesday that the central bank will take action if inflation and economic performance are in line with market expectations. Data to be released on Monday is expected to confirm that Japan's economy achieved continuous growth for five consecutive quarters ending in June. The ongoing increase in wages is a key component of the Bank of Japan's vision of achieving a "virtuous cycle" whereby wage growth drives consumption, paving the way for demand-driven price increases. It should be noted that the latest wage statistics are supported by strong summer bonuses, which increased by 7.9% compared to June. With Japan's largest automakers facing President Donald Trump's tariff attacks, the sustainability of such variable compensation in bonuses is not guaranteed, particularly as automakers are hit hard. Trump signed an executive order on Thursday to implement a trade agreement reached by the two countries in July. According to the agreement, U.S. tariffs on imported Japanese cars will be significantly reduced from the current 27.5% to 15%. Japanese manufacturers saw an overall decrease in pre-tax profits in the period from April to June, with transportation equipment manufacturers dropping by a significant 29.7%. So far, Japan's largest automakers have borne the brunt of the tariff impact, sacrificing profit margins to maintain market share. Toyota Motor Corporation recently warned that tariffs would have a significant impact on its profits, amounting to 1.4 trillion yen (approximately $94 billion). If profits continue to be under pressure, it remains unclear how much room manufacturers will have to increase wages in the future. Even if some of the increase comes from bonuses, the fact is that income is rising significantly," said Kohei Otsuka. "I believe we are beginning to see signs of gradual wage growth, which is now starting to correlate with consumption." Currently, higher salaries appear to be gradually translating into consumer spending. Household consumption in Japan increased by 1.4% in July compared to the same period last year, marking the third consecutive month of growth, driven primarily by spending on transportation and communication. In order to further stimulate demand, Prime Minister Shinzo Abe is reportedly set to instruct the preparation of an economic stimulus plan this week, including the distribution of 20,000 yen in cash. It is understood that private consumption in Japan has contributed positively to overall economic growth for five consecutive quarters. However, doubts remain about the ability of the Abe government to implement stimulus measures. Facing pressure from some members of his party, Abe is facing calls to step down after the ruling Liberal Democratic Party suffered setbacks in parliamentary elections under his leadership. The party is expected to vote on Monday on whether to hold an early party leadership election, which would essentially lead to Abe's resignation. While cooling down gradually, sticky inflation continues to be a headache for the Abe government. Dissatisfaction with the rising cost of living among households was a key factor in the setbacks for the ruling Liberal Democratic Party in the July upper house elections, leading the ruling coalition to lose its majority in both houses. Looking ahead, wage dynamics in Japan may remain divergent. The ongoing labor shortage may continue to put upward pressure on wages as companies compete for talent. However, export businesses face a gloomy outlook due to the global business headwinds caused by U.S. trade policies. Japanese export data has declined for three consecutive months, with July marking the largest drop in four years.