(Bloomberg) -- Japanese workers’ real wages rose for the first time in more than two years, brightening the prospects for a recovery in consumption and the emergence of a positive growth cycle long sought by the Bank of Japan.
Real cash earnings for workers climbed 1.1% in June from a year earlier, turning positive for the first time since March of 2022, the labor ministry reported Tuesday. Economists had expected the reading to remain negative at minus 0.9%. Nominal wages grew 4.5%, far surpassing the consensus estimate of a 2.4% rise.
A more stable measure of the trend that avoids sampling problems and excludes bonuses and overtime showed wages for full-time workers increasing by 2.7%, while base salaries gained 2.3%, the most in nearly 30 years.
Tuesday’s data will come as welcome news for the BOJ after it raised interest rates and unveiled a roadmap for quantitative tightening last week. The central bank is looking for evidence that wage gains will fuel spending, spurring demand-led price gains in a virtuous cycle. In explaining last week’s rate hike, Governor Kazuo Ueda noted that inflation has been on track, driven by positive factors including higher wages feeding into service prices.
The June figures were likely exaggerated by strong bonuses, according to Taro Saito, head of economic research at NLI Research Institute.
“I believe that real wages will not settle in positive growth until the fall,” Saito said. “Consumption is currently sluggish, but I expect it to gradually pick up because wage hikes are spreading and the employment and income environment is improving.”
A separate report showed that household spending fell in June, with real outlays adjusted for inflation sliding 1.4% from a year earlier. Economists had forecast a 0.8% decline. Spending edged 0.1% higher from May.
The nation’s largest umbrella group for unions secured wage increases of more than 5% for its constituents in this year’s annual negotiations, the largest gains in more than 30 years. While that agreement only directly affected workers at large companies, the nation’s chronic labor shortage means employers at smaller firms are also having to raise wages as they compete for personnel.
The BOJ has said in the past that about 80% of wage increases agreed for a new fiscal year are reflected in data by June.
What Bloomberg Economics Says...
“In a vacuum, the wage report would have given the BOJ more confidence to go ahead with another rate hike in coming months. But recent market volatility could cause the BOJ to think twice on its rate strategy, even if it is growing more convinced that the wage-price cycle is spinning in a direction that supports sustainable 2% inflation.”
— Taro Kimura, economist
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Temporary workers are also seeing higher remuneration, with wages for part-time workers rising 4.9% in June. The labor ministry’s panel last month called for raising the minimum hourly salaries for the current fiscal year by a record 5%.
In the June data, “special compensation” jumped 7.6% as workers received summer bonuses. Some workers also received additional pay retroactively to reflect pay increases agreed for the fiscal year from April.
Personal consumption has fallen in every quarter for the last year, and the BOJ has said for some time that it’s expecting a rebound. Wage trends will remain a key indicator influencing that narrative as well as the path of BOJ policy from here. Some economists have said market ructions in recent days have dimmed the likelihood of another rate hike this year.
“Concerns about overseas economies are growing,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “There is a sense of caution about employment and thus whether the strong wage momentum will continue” within that context.
After the latest decision, Ueda indicated that the bank would continue to raise interest rates if economic and price movements align with the bank’s outlook. The governor didn’t rule out the possibility of another rate hike before year-end, stressing that all decisions will be data dependent. A survey of economists taken before the market meltdown showed that about two-thirds of respondents expected the policy rate to rise to 0.5% by December.
Going forward, upward pressure on wages will likely persist, largely due to the tight labor market. The latest employment data showed that Japan’s jobless rate edged down in June, underscoring the nation’s chronic labor shortage. In its outlook report released last week, the BOJ maintained that labor market conditions are likely to tighten further, feeding into income growth.
Consumption trends are also a point of interest for Prime Minister Fumio Kishida’s government, which implemented a ¥40,000 tax cut for many households in June to support consumer sentiment. The premier is struggling to shore up his support ahead of a party leadership poll in September that could precede a general election. Recent opinion polls showed his approval rating hovering around 30%.
(Updates with economists’ comments.)
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