Bank of Japan key wage report sets the tone: rate hike on Friday is a certainty

The Bank of Japan stated that there has been further progress in wages, which effectively laid the foundation for the rate hike this week. Its report indicated that despite the impact of the U.S. tariffs, the momentum of wage growth remains strong. The Bank of Japan stated in a report released on Monday: "Most reports from headquarters and branches indicate that companies expect to raise wages in the 2026 fiscal year by a similar amount to the 2025 fiscal year, which was a period of significant wage growth." Earlier this month, Bank of Japan Governor Kuroda Haruhiko stated that the central bank would actively collect data on wage growth to make an appropriate decision on whether to raise rates at the meeting ending this Friday. The report released on Monday was the first of its kind from the bank, and these positive findings made it easier for Kuroda to explain the decision to raise the benchmark interest rate to 0.75%. This wage report came after the Bank of Japan released its quarterly Tankan survey earlier on Monday. The survey report showed that the confidence of Japan's largest manufacturers in the future has risen for the third consecutive quarter, reaching the highest level in four years. Non-manufacturing survey data remained near the highest level since the early 1990s. The Bank of Japan stated in the report that most companies believe that the wage increase in the 2026 fiscal year should be similar to that in the 2025 fiscal year, as they believe it is necessary to retain and motivate employees in the ongoing and severe labor shortage. Earlier this year, Japan's largest trade union federation, Rengo, achieved the highest wage increase for its members in nearly three decades through annual negotiations. At the end of October, the union stated that it would seek at least a 5% wage increase in next year's wage negotiations, while newly appointed Prime Minister Kato Katsunobu is also working to maintain the country's wage growth momentum. As this negotiation process unfolds again, most department managers indicate that this year's wage increase may be similar to last year's, suggesting a positive outcome for next year. According to overnight forward market quotes, traders believe there is a 94% chance of a rate hike this week. A survey showed that all 50 economists expect the central bank to raise the benchmark interest rate to 0.75% at the policy meeting ending on Friday, marking the first restart of a rate hike cycle since January last year under Governor Kuroda's leadership. Since the rate hike has already been fully priced in by the market, many observers of the Bank of Japan's dynamics believe the focus of this meeting will be on any signals that indicate the pace of future rate hikes and the potential peak of this rate hike cycle. Kazuhiko Sano, Chief Bond Strategist at Tokai Tokyo Securities, wrote in a survey response: "This rate hike is sealed. One focus is whether the view on neutral rates will be adjusted." Nearly two-thirds of analysts believe that the Bank of Japan will raise rates approximately every six months starting this month. Around 20% believe there will be one rate hike per year, while only 2% believe there will be a rate hike every quarter. The median forecast for the terminal rate of this rate hike cycle by economists has risen to 1.25%, indicating that many expect two more rate hikes after this week's hike. The Bank of Japan has previously stated that Japan's neutral rate is between 1% and 2.5%. Nearly half of analysts expect the Bank of Japan to provide some new information on its view of the neutral rate, while 30% believe it will not, and 23% find it hard to say. In addition, sources revealed that the Bank of Japan may start selling its holdings of exchange-traded open-end index funds (ETFs) as early as next month, with the process expected to take several decades to complete. As of the end of September, the Bank of Japan held ETFs with a book value of 37.1 trillion yen, with a market value of 83 trillion yen (around $534 billion). It is reported that in September this year, the Bank of Japan announced plans to sell its holdings of ETFs and Japanese real estate investment trusts (J-REITs) in the market. Specifically, the Bank of Japan plans to sell ETF holdings at a pace of approximately 330 billion yen (book value) per year, and sell real estate investment trust holdings at a pace of approximately 5 billion yen per year. This is the first time the Bank of Japan has mentioned specific plans to dispose of its ETF holdings. Sources stated that the Bank of Japan aims to maintain a steady pace of selling ETFs each month. They added that the Bank of Japan still intends to avoid disrupting the market as much as possible. However, sources also revealed that if a situation similar to the 2008 global financial crisis were to occur, the central bank might stop selling ETFs. The sale of the Bank of Japan's ETF and J-REIT holdings is seen as an important step towards moving away from long-term ultra-loose monetary policy and towards policy normalization, with strong symbolic significance.