Japan’s base salaries jump most since 1995, puts BOJ policy into view

Japan’s nominal base salary grew at the fastest pace in 28 years in May, government data showed on Friday, adding fuel to the debate over when the central bank will unwind its ultra-loose monetary stimulus.

Global financial markets have been closely watching Japan’s wage data, as Bank of Japan Governor Kazuo Ueda regards pay growth as a key gauge to consider in deliberations about a shift in policy.

Regular wages rose 1.8% in May from a year before, labor ministry data showed, the biggest gain since February 1995. The strong base pay growth boosted worker’s total cash earnings, or nominal wages, by 2.5% in May, after a revised 0.8% increase logged in April.

“If inflation stabilizes around 2% and nominal wages accelerate to 3% to 3.5%, the condition could be set for the BOJ to dismantle monetary easing framework from the Kuroda era,” said Hisashi Yamada, economist and Hosei University professor.

Japan’s largest labor organization Rengo said on Wednesday that major companies had agreed to average pay hikes of 3.58% this year, the highest since 3.9% in 1993.

The result of the spring labor talks, known as “shunto”, will be increasingly seen in government wage statistics over the next few months, a labor ministry official said.

Still, real wages contracted 1.2% in May, the 14th consecutive month of year-on-year declines, as relentless consumer inflation outstrips nominal pay growth and squeezes households’ buying power. Analysts say the real wages will remain in contraction for the rest of 2023.

Separate data on Friday showed Japanese household spending fell 4.0% in May from a year earlier, down for a third month and more than the median market forecast for a 2.4% decline. Spending on a variety of items from food to clothes to transportation were down, the data showed.

On a seasonally adjusted month-on-month basis, household spending was down 1.1%, versus an estimated 0.5% gain to mark a fourth month of decline.

“The effects of consumer price inflation are becoming more prevalent in the household spending, offsetting the boon to Japan’s consumption from eased coronavirus restrictions,” said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

In an interview with the Nikkei newspaper published on Friday, BOJ’s Deputy Governor Shinichi Uchida said the central bank must support the economy with easy policy.

Taro Saito, executive research fellow at NLI Research Institute, said next year’s spring labor talks are expected to yield wage growth mostly equivalent to this year’s, because of the longer-than-expected price inflation and labor shortage.

“But the biggest risk to the scenario is if the economy itself remains robust until next spring, given the wobbly global economic conditions,” he said.