Inflation cooling brings a timely rain: Japan's real wages turn positive for the first time in 13 months, clearing the way for the central bank to raise interest rates in April.

With inflation easing, Japanese workers' real wages achieved positive growth for the first time in 13 months. This positive change is expected to boost consumer confidence and provide support for the key policy goals of the Bank of Japan and the government. Data released by the Japanese Ministry of Health, Labour, and Welfare on Monday showed that real wages in January, adjusted for inflation, increased by 1.4% year-on-year, significantly exceeding economists' expectations of a 0.9% increase. This is the fastest growth of this indicator since May 2021, ending a downward trend that lasted throughout 2025. Nominal wages also increased by 3%, surpassing market expectations. Among them, base wages rose by 3%, marking the largest increase in over 33 years. A more stable indicator, which excludes bonuses and overtime pay to avoid sampling issues, showed that wages for regular employees increased by 2.2%. The decline in prices helped drive wage growth positive, but rising oil prices pose a threat Yuichi Kodama, Chief Economist at Meiji Yasuda Research, stated: "The increase in real wages is due to the policy effect causing prices to decline, but whether this trend can be sustained is another question. The recent rapid rise in oil prices makes it difficult to predict the durability of this positive momentum." As food and energy prices stabilize, key inflation indicators in Japan slowed to their lowest level in two years in January. Economic measures introduced by Prime Minister Sanae Takaichi, including subsidies for water and electricity, helped alleviate household burdens, while the slowdown in food inflation was partly due to a higher base comparison from the same period last year. However, these effects are expected to diminish over time. Supporting normalization of monetary policy Nevertheless, this data remains positive for the Bank of Japan. If wage increases can boost personal consumption, it will provide support for demand-driven inflation pressures. Achieving a virtuous cycle between wages, consumption, and prices is a key condition for the Bank of Japan to continue normalizing policy through rate hikes. Sanae Takaichi is also committed to achieving sustainable autonomous economic growth. Economist Taro Kimura stated, "The stronger-than-expected wage growth in January reinforces the Bank of Japan's judgment that the virtuous cycle between wages and prices is strengthening, which will help achieve the 2% inflation target. The Bank of Japan will view this data as an early signal that wage negotiations this year may bring about another round of steady growth, which will then be transmitted to consumer prices and inflation expectations." Last week, Bank of Japan Governor Haruhiko Kuroda stated that while the central bank is gradually withdrawing its accommodative policy measures in pursuit of stable 2% inflation, wages need to grow "at an appropriate pace." Due to the new uncertainties injected into the global outlook by the conflict between the US and Iran, the market widely expects the authorities to keep the benchmark interest rate unchanged at the next policy meeting on March 19. However, overnight index swap markets pricing shows that traders believe there is a 61% probability of a rate hike before the end of April. Negotiations continue as businesses respond positively to wage increase demands Investors are also watching closely the results of this month's annual wage negotiations. Last week, the largest union federation in Japan, Rengo, announced that its member unions are seeking an average wage increase of 5.94%, indicating that momentum for wage growth is still ongoing. A year ago, Rengo's affiliated unions requested a wage increase of 6.09%, eventually securing a 5.25% increase, the largest in 34 years. Economists generally predict that this year's negotiation results will remain high, with a median forecast of a 5% wage increase. Continued labor shortages are the main driver. According to a February report from the Teikoku Databank, for the fourth consecutive year, more than half of the companies reported a shortage of regular employees. Strong corporate profits may help sustain this trend. Data released earlier this month by the Ministry of Finance showed that corporate profits increased year-on-year for the fifth consecutive quarter as of December. Companies' positive responses also provide support: Kubota Corporation has proposed a wage increase of around 6%, while Dai-ichi Life Holdings has committed to a 7% wage increase. This momentum seems to have extended to export companies as well, despite pressure from US tariffs over the past year. Automakers such as Mitsubishi Motors and Mazda have been among the first in the industry to promise wage increases as requested by workers. Kodama predicts, "I believe that workers will achieve an overall wage increase of around 5% in this round of wage negotiations." He added that the non-manufacturing sector may become a driver for maintaining growth.