Japanese wage growth began to show signs of increase in 2026. Could the next interest rate hike by the central bank be just around the corner?

Despite facing profit pressure from US tariffs, early signs of wage negotiations for Japan's 2026 fiscal year show that wages will once again see steady growth, providing a basis for further interest rate hikes by the Bank of Japan. Bank of Japan Governor Katsuo Ueda previously stated that "more data" is needed to assess the initial momentum of next year's wage negotiations particularly whether companies affected by US tariffs will continue to raise wages. This statement has once again made wage prospects a focus of the market. Japanese labor unions have explicitly stated that they will once again demand significant wage increases. Continued wage growth will support private consumption and give the Bank of Japan confidence to raise interest rates without undermining economic recovery. Despite significant wage increases in recent years, real wage growth remains in negative territory due to core consumer inflation consistently exceeding the Bank's 2% target. Rengo, Japan's largest labor union organization with 7 million members, plans to seek wage increases of 5% or more in the 2026 labor negotiations. This is consistent with their demands in 2025, which ultimately resulted in the largest wage increase in 34 years this year. As one of the industries most severely impacted by US tariffs, the head of Japan's largest automotive industry union stated this month that there are no plans to lower wage demands in next year's labor negotiations despite squeezed business profits. Annual wage negotiations in Japan are typically drafted by labor unions at the end of the year, with formal negotiations starting early the following year and final results announced in March. Certainly, companies may not fully respond to the wage demands of labor unions for 2026. In the coming months, the impact of US tariffs on Japanese goods may intensify, casting a shadow over Japan's export-dependent economy. However, as of now, Japan's manufacturing sector remains resilient. A survey this month showed that, boosted by a weak yen and steady orders, the manufacturing confidence index for November reached a nearly four-year high. Labor market tightness may also compel companies to maintain relatively high wage increases. Another survey found that 72% of surveyed companies plan to maintain wage levels similar to those of 2025 in 2026. Pressure from labor shortages is particularly acute in the restaurant industry. The izakaya chain operator Watami announced that starting in 2026, it would offer an annual average 7% multi-year wage increase scheme to around 1,200 full-time employees in Japan. Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, stated: "The overall momentum is strong, with good corporate profits from July to September. The key question is whether the average wage increase can exceed 5%." An November survey by the Japan Center for Economic Research showed that economists predict an average wage increase of 4.88% for 2026, higher than the expected increase of 4.74% for 2025 negotiations in January, and a this year's actual increase of 5.52%. Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute, pointed out that "companies still have ample room for wage increases as profit levels remain high." He expects the average wage increase for 2026 labor negotiations to be 5.2%, slightly lower than 2025, but exceeding 5% for the third consecutive year. Katsuo Ueda to attend Nagoya business conference The new government of Prime Minister Sanae Takichi may also press companies to raise wages, as she promised in her election platform to create a strong economy where wage growth outpaces inflation. According to reports, the largest business lobbying group in Japan, Keidanren, will issue next year's labor negotiations guidance to member companies in January, emphasizing the importance of maintaining strong wage growth. Katsuo Ueda stated in parliament last Friday that the central bank is still collecting various data and information on wage prospects, including from regional branches. He stated, "The Bank of Japan will closely monitor various data and information in future meetings to discuss the feasibility and timing of raising interest rates." Analysts state that while the results of wage negotiations for large companies will not be clear until March next year, some company executives may signal their 2026 wage plans as early as next month. More clues about the timing of the Bank of Japan's next interest rate hike may emerge on December 1. At that time, Katsuo Ueda will speak to business leaders in Nagoya, central Japan. A survey shows that a slight majority of economists expect the Bank of Japan to raise interest rates in December. This expectation has been strengthened by the yen falling to a 10-month low against the dollar.