A Japanese 10,000 yen banknote is lined up in Kyoto, Japan, Thursday, Nov. 2, 2023.
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Japan’s real wages have fallen for 23 consecutive months, indicating that high inflation is still eroding the spending power of the country’s consumers.
Department of Labor data Data released on Monday showed real wages fell 1.3% in February from a year earlier, accelerating from January’s revised 1.1% decline.
However, in terms of nominal wages, wages increased by 1.8%, of which basic wages increased by 2.2%. The data shows that special payments, including bonuses, are reduced by 5.5% annually.
The data comes after Japan’s unions posted their highest wage growth in 33 years. But these wage increases will only benefit a small proportion of Japanese workers, as only 16.3% of workers in Japan are unionized, and most unionized workers are concentrated in large companies.
This suggests that any “virtuous cycle” between wages and prices may be limited, as workers in small and medium-sized enterprises face higher prices amid stagnant wages.
Inflation has exceeded the Bank of Japan’s 2% target every month since April 2022. If real wages continue to fall, consumers may choose to save rather than consume, creating little incentive for demand and prices to rise.
Do not return NIRP and YCC
Hirofumi Suzuki, chief currency strategist and head of the research group at Sumitomo Mitsui Banking Corporation, told CNBC that the pay increases for union workers are likely to be tapered and expanded. He noted that this year’s “wage increases have also been relatively strong and appear to be in line with the Bank of Japan’s virtuous cycle.”
Suzuki said the latest data from the Japan Federation of Trade Unions, also known as Rengo, estimated nominal wage growth at SMEs at 3.2%, not far behind the 3.7% rate at large companies.
Bank of Japan regional economic assessment The April data also said employment and income conditions had “modestly improved” in eight of Japan’s nine regions.
Suzuki said that even if real wages do not rise, the Bank of Japan is unlikely to resume negative interest rates or yield curve control policies because the current inflationary environment is different from the past.
Suzuki said looking ahead, indicators investors should watch include inflation, wages and consumption data, especially in June and July.
Almost every Japanese company’s fiscal year begins on April 1. As such, this is often the day for major announcements, including salary increases.
Economists will monitor whether growth actually translates into higher real wages and spurs consumption. The monthly wage report is one of the Bank of Japan’s key considerations when formulating monetary policy.
When the Bank of Japan ended its negative interest rate policy and scrapped its yield curve control policy last month, it said “recent data and anecdotal information gradually suggest that the virtuous cycle between wages and prices is becoming stronger.”
The Bank of Japan also predicts that by the end of 2024, the “price stability target” of 2% will be achieved in a sustainable and stable manner.
As a result, Suzuki expects the Bank of Japan to wait until early autumn before making further changes to its monetary policy. SMBC predicts the next rate hike will be in October.
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