(Bloomberg) -- Wage growth for Japanese workers showed further signs of strengthening in September, a development that will be closely scrutinized by the central bank as it looks for more evidence of higher pay that can support stable inflation before paring back stimulus.

Nominal cash earnings for workers rose 1.2% from the previous year, accelerating from a revised 0.8% increase in August largely on the back of gains in base pay, the labor ministry said Tuesday. A data set cited by Bank of Japan Governor Kazuo Ueda on Monday showed base pay for regular workers rose 2.2%, the highest figure for a stable sample dating back to 2016. 

Still, real wages continued to fall for an 18th month, a factor that helped drive down household spending in September.

While the wage trend continues to improve, the central bank will likely wait for more indictations that a virtuous cycle between wages and prices is emerging, before embarking on any major changes in its policy direction. That’s a move expected by most economists early next year.

“This is a continuation of a more positive trend than expected and this will be a very encouraging factor for the BOJ governor,” said Kohei Okazaki, senior economist at Nomura Securities Co.  The ongoing labor shortage will be a catalyst for continued pay hikes, he added.

Last week the central bank decided to further loosen its grip on 10-year yields, by ditching a pledge to buy bonds at a fixed-rate of 1% every day and doubling the reference point of its yield cap. While the shift suggested another small step toward normalization, Governor Ueda remained dovish during the post-decision press conference, reaffirming the bank’s commitment to patiently continuing with monetary easing. 

In his comments Monday, Ueda played down the likelihood that the BOJ will scrap its negative interest rate before the end of the year, but speculation continues that he may still move before checking on the first results of pay negotiations in the spring.

“If he wants to thoroughly check the collated results then it’s likely April,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute, referring to the timing of a BOJ move to end the negative rate and its control of bond yields. But if there are enough signs that companies are willing to raise pay, the bank could act earlier, he added.

“Given the mood at the moment, I don’t think it’d be strange if they moved in January,” he said.

Positive developments are already underway for pay talks culminating in the spring. Rengo, the country’s largest labor union federation, has demanded higher pay increases, while the nation’s biggest business lobby Keidanren is reportedly advocating base salary hikes. 

Some companies, including Meiji Yasuda Life Insurance Co. and Suntory Holdings Ltd., have announced ambitious wage growth targets of as much as 7%, according to local media reports.

What Bloomberg Economics Says...

“Looking beyond October, we expect wage growth to keep a steady pace at least for several months. The risks tilt down, though, as weakness in external demand, particularly in China, may drag on the economy — prompting companies to keep pay increases in check.”

— Taro Kimura, economist

For the full report, click here

Although Tuesday’s data showed an acceleration in pay growth, it may not be enough for the BOJ yet, given that nominal wage gains of 3% have been mentioned in the past as a level that’s needed to generate stable 2% inflation.

Real cash earnings slid 2.4% from a year earlier, as price hikes continue to remain stronger than the central bank’s initial assumption. Inflation in Tokyo heated up again in October, highlighting the persistence of upward pressure on prices.

The higher prices have been sapping consumers’ spending power. Japan’s households cut their spending in September by 2.8% from the previous year, though outlays inched up 0.3% from a month earlier. 

Prime Minister Fumio Kishida is attempting to stimulate consumption amid the price gains with a larger-than-expected economic stimulus package announced last week. 

The package, totaling over 17 trillion yen ($114 billion), includes measures such as income tax cuts and cash handouts to lower income households. It is expected to boost the economy by 1.2% each year for the next three years through a ¥19 trillion lift to the economy in total, according to cabinet office calculations.

Still, those efforts haven’t helped Kishida’s popularity. Support for the prime minister hit a fresh low in a major to fall below a level seen as a danger zone for premiers, with respondents indicating they did not back his latest economic stimulus package.

--With assistance from Toru Fujioka and Keiko Ujikane.

(Updates with economist comments, more details)

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