Actual wage growth in Japan hits new high in 2021, April rate hike "loaded gun"

After adjusting for inflation, the real wage growth of Japanese workers has reached the fastest level since 2021, providing a basis for the Bank of Japan to consider an interest rate hike as early as this month. Data released by the Japanese Ministry of Labor on Wednesday showed that in February, real wages increased by 1.9% year-on-year, marking the second consecutive month of growth. Economists had previously predicted an increase of 1.3%. Nominal wages rose by 3.3%, higher than the market's general expectation of 2.7%. Base wage increased by 3.3%, marking the largest increase in nearly 34 years; while the more stable measure that excludes bonuses and overtime payments to avoid sampling errors, full-time employees saw their real wages increase by 3.1%, marking the largest increase since comparable data has been available since 2016. Amid wage increases, the Bank of Japan has been looking for signs that robust wage growth can stimulate consumption, boost demand, and ultimately drive sustainable price increases. The growth in real wages benefited from the temporary moderation of inflation brought about by winter utility subsidies. As these subsidies are gradually phased out, along with the conflict in the Middle East driving up oil prices, inflation may rise again in the coming months. Masayuki Suzuki, Chief Economist at Sumitomo Corporation Global Research, stated, "Currently, the slowdown in inflation is the main driving factor, but nominal wage growth exceeding 3% is still a substantial advantage. Despite some concerns for the future, based on the current situation, an interest rate hike in April is not surprising." By 2025, Japan's inflation rate has averaged above the Bank's 2% target level for four consecutive years. During this period, due to households cutting non-essential expenses to pay for necessities like expensive food, domestic consumption in Japan remains unbalanced. Nevertheless, the data released on Wednesday may boost optimism about the prospects of domestic demand growth in Japan, especially with new signs of a strong trend in wage increases emerging. Japan's largest labor union federation, Rengo, reported last week that its members had negotiated for a 5.09% wage increase in annual negotiations with employers, which is not far from the level of last year. The results of last year's wage negotiations were the largest increase in over thirty years. Analysis suggests that the unexpectedly strong growth in Japan's base wages may enhance the Bank of Japan's confidence in raising interest rates at the meeting on April 27-28. Looking ahead, another strong outcome in the spring wage negotiations suggests that wage growth for this fiscal year starting from April will be on par with last year. Overnight swap markets indicate a 60% likelihood of a 25 basis point rate hike at the Bank of Japan's meeting on April 28. Following the Bank of Japan's decision to maintain its policy last month, Governor Kikuo Iwata stated that the Bank will closely monitor the results of wage negotiations and corporate pricing behavior to assess whether a sustained wage-price cycle is forming. Uncertainty remains high due to the tense situation in the Middle East, which could affect business profits. Rising commodity prices and depreciation of the yen are squeezing profit margins, especially for small businesses, limiting their ability to raise wages. A report released by the Bank of Japan on Monday showed that while wages and pricing plans remain largely unchanged from last year, companies are increasingly concerned about the future outlook. A survey by the Shinkin Central Bank Research Institute last month showed that 45% of small and medium-sized enterprises did not raise wages this year, with many expressing concerns about the uncertainty of future business conditions. Another issue is whether steady income growth can be translated into consumption. Despite real wages turning positive, household spending in February still exceeded expectations, highlighting the fragility of domestic demand in Japan.