Japan's nominal wages rise in bright spot as outlook darkens

Japan Times

07-04-2025

Japan's nominal wages rose more than expected in a positive sign for the domestic economy just as external headwinds related to trade begin to cloud the outlook.
Nominal cash earnings for workers climbed 3.1% in February from a year earlier, with the pace accelerating from a revised 1.8% in January, the labor ministry said Monday. The reading beat economists' estimate of 3%.
A more stable gauge that generally irons out sampling inconsistencies showed base pay for full-time workers increased by 1.9%, slowing below 2% for the first time in 18 months. Some components of the gauge were reshuffled this time.
In a reflection of persistent price pressure, real wages declined for a second straight month, falling 1.2% from a year earlier. Data due next week is expected to show that consumer prices excluding fresh food have now grown at a pace at or above the Bank of Japan's 2% target for a full three years through March.
"When looking at nominal wages, the pay trend appears to be steady. However, base salaries, including the 'same-sample' dataset the BOJ is closely watching, have shown significant slowdowns, and that's concerning,' said Takayuki Toji, senior economist at Japan Post Insurance. "Since there's also the impact of sample changes this time, it's difficult to evaluate based on just a single month, but it's worrisome.'
Until recently, solid wage gains were among the positive factors keeping the BOJ on the path toward more gradual rate hikes as authorities sought to normalize policy settings. That narrative was abruptly upended last week by U.S. President Donald Trump's announcement of "reciprocal tariffs," which will impose a 24% across-the-board duty on Japanese goods. It's a steeper tax than many had anticipated.
Economists have trimmed their growth projections for Japan and pushed back their rate hike expectations. Until last week, most saw a hike by June or July, with the outside chance of a move when authorities next set policy on May 1. Markets indicate that traders now see a rate increase in September at the earliest. Toji said July would be the earliest possible month for a hike.
"Base salaries for full-time workers — a measure that smooths out distortions from survey sample changes — rose 1.9% year on year, down from a 2.9% rise in January," said Taro Kimura, economist at Bloomberg Economics. "Gov. Kazuo Ueda once said a rise of around 3% would be consistent with the 2% inflation target.'
Speaking after Trump's announcement, Ueda stressed the need to monitor developments closely, while reaffirming the bank's commitment to raise rates if inflation and economic growth hold firm.
Wages are expected to keep rising through at least the rest of the year, supported by strong outcomes in the latest round of annual labor talks. Japan's largest labor union federation Rengo reported last week that its members secured an average 5.42% pay hike, the biggest in over three decades, topping economists' earlier estimates of around 5%.
Rengo also noted that small firms achieved a 5% increase, the highest since 1992. That points to broad-based wage momentum, as the bulk of the nation's company employees work at small firms. These increases will gradually show up in payrolls from April through the summer, according to a BOJ analysis.
A tight labor market is driving the upward pressure, as employers compete to attract and retain workers. Japan's jobless rate dipped to 2.4% in February, remaining one of the lowest among developed nations. Last year a record 342 firms went bankrupt due to a manpower crunch, according to Teikoku Databank.
In its January outlook report, the BOJ anticipated continued nominal wage growth, citing deepening labor constraints.
Meanwhile, rising consumer prices are fueling workers' demands for better pay. In April, over 4,000 food products faced price hikes, the highest count since October 2023, according to another Teikoku Databank survey.
Sticky inflation continues to weigh on real incomes, complicating policymakers' efforts to create a virtuous cycle driven by resilient domestic demand. Japan's households cut back on spending for the first time in three months in February.
With a key election approaching this summer, Prime Minister Shigeru Ishiba faces mounting pressure to address both economic and diplomatic concerns. In response to U.S. tariffs, he pledged to protect domestic industries and jobs, while continuing to press Washington for an exemption.
Ishiba said he wants to put together a wide-ranging deal as the basis for negotiations with Trump.
"When we negotiate with the U.S. we want to present a package. That will take some time, but we will make it a success,' Ishiba told reporters over the weekend.
To support the domestic economy, Ishiba's government has introduced a raft of measures aimed at lifting incomes and easing cost pressures. The initial budget, which Ishiba's minority government managed to pass last week just a day before the start of the new fiscal year, includes a suite of price relief measures, such as extended gasoline subsidies and income tax cuts.
Ishiba also vowed to outline steps to raise the minimum wage by May. He has previously set a target of increasing Japan's minimum hourly wage to ¥1,500 ($10) within five years, requiring an annual increase of over 7% from the current ¥1,055.