Japan's wage growth hits a new high since 1997, significantly raising expectations for interest rate hikes by the Bank of Japan

According to the Zhitong Finance APP, Japan's nominal wage growth rate has reached its fastest level in nearly thirty years, supporting the Bank of Japan's recent interest rate hike policy decision and paving the way for further tightening of monetary policy. Financial markets have significantly increased their expectations for the Bank of Japan's interest rate hikes following the release of wage data. As the Bank of Japan considers its future interest rate path, wage data remains a key indicator of focus.

Statistics released by Japan's Ministry of Labor on Wednesday showed that in December, nominal cash income for Japanese workers increased by 4.8% year-on-year, up from a revised 3.9% in November. This figure exceeded the general expectations of Japanese economists and marked the largest increase since 1997. This strong growth was primarily driven by a surge in bonuses.

After the data was released, the exchange rate of the US dollar against the Japanese yen fell from around 154.40 to 153.90, indicating an appreciation of the yen against the dollar. Notably, the yen is one of the few sovereign currencies that has shown resilience against the dollar recently, as the dollar has appreciated significantly against almost all currencies globally, especially emerging market currencies, under the pressure of tariffs imposed by Trump.

Another positive development in terms of compensation is that Japan's real wages have increased for two consecutive months in December. Economists had previously expected that real wages would decline in the context of accelerating inflation. The overall inflation rate in Japan has remained above 2% for nearly three years, reaching 3.6% in December.

Even after the Bank of Japan's latest interest rate decision, the trend of wage growth in Japan continues to be closely monitored by the market, as it may affect the timing of future interest rate hikes by the Bank of Japan. Last month, the Bank of Japan implemented its third interest rate hike in less than a year after assessing wage growth and the initial market reaction to Donald Trump's return to the White House.

Japan's nominal wage growth rate has reached a new high in nearly thirty years, primarily driven by a surge in bonuses, while real wages have also risen for two consecutive months. This trend supports the Bank of Japan's interest rate hike path and provides a basis for further tightening of policy. However, inflation and the weakness of the yen remain key challenges to the sustained growth of real wages, and the market is closely watching the results of the spring wage negotiations and their potential impact on consumption and the economy.

Masato Koike, a senior economist at Sompo Institute Plus, stated, "Wage trends are certainly a key indicator for the Bank of Japan's monetary policy decisions. So far, the trend looks to be in line with expectations, but basic wages are unlikely to accelerate further before the spring negotiations." He added that the Bank of Japan's focus will be on the final results of the spring wage negotiations, known as "Shunto."

It is understood that during the press conference following the interest rate decision, Bank of Japan Governor Kazuo Ueda hinted at the possibility of further rate hikes in the near future, noting that Japan's benchmark interest rate is still below the neutral rate level Ueda Kazuo emphasized the need to monitor the domestic economic conditions in Japan before taking the next steps, reminding the market of the importance of paying attention to the trajectory of wage developments.

In Wednesday's data, a more stable wage trend indicator (to avoid sampling bias distortion) showed that the basic salary of full-time employees unexpectedly increased by 2.8%, maintaining a strong growth level of over 2% for more than a year.

"The unexpected strong growth of cash earnings in Japan's labor market in December—mainly driven by generous winter bonuses—will inevitably boost consumer spending and the consumer price index. The details show that the growth rate of basic salaries remains robust. Strong data may enhance the Bank of Japan's confidence that the wage growth trend is consistent with the 2% inflation target," said Bloomberg Economics economist Taro Kimura.

According to Bloomberg survey data released after last week's January meeting, most observers of the Bank of Japan expect that the central bank will tighten monetary policy again in about six months, with July seen as the most likely time for another interest rate hike.

Looking ahead, the market is closely watching the Japanese wage negotiations, which will peak in March, to assess the sustainability of wage growth. So far, negotiations have progressed smoothly, with reports that some large Japanese companies, including Asahi Breweries and Aeon Co., Ltd., have committed to offering salary increases of over 7% for some employees.

Leaders of Japan's largest labor union organization are also frequently meeting with Japanese business representatives to push for higher wage increases, emphasizing their goal of an overall wage growth of 5%, with a slightly higher target of around 6% for small businesses.

To sustain strong growth in real wages, key issues remain inflation and the persistent weakness of the yen, especially the latter, which has significantly pushed up the prices of imported goods. Japanese prices have reached or exceeded the Bank of Japan's 2% inflation target for nearly three years, putting some pressure on consumer confidence; however, the Bank of Japan's governor is still monitoring whether inflation can be maintained above 2% in the long term.

As more Federal Reserve officials hint that the schedule for interest rate cuts may continue to be delayed under the policy uncertainty triggered by Trump, the exchange rates of non-dollar currencies may remain under pressure for some time. Additionally, a series of tariff-related announcements have exacerbated inflation risks in the U.S., which could further weaken the yen, although some analysts indicate that expectations of a rate hike by the Bank of Japan will support the yen's continued strong performance among non-dollar currencies.

Japan's long-standing slow growth in real wages has made many households cautious about spending, which is a concern not only for the Bank of Japan but also for the new government led by Prime Minister Shigeru Ishiba. The Ishiba government aims to boost consumption through consumption measures in a stimulus plan worth 21.9 trillion yen (approximately 141 billion USD), including utility subsidies and cash assistance for low-income families.

Japan's latest consumption trends will be reflected in the upcoming economic data, including household spending data to be released on Friday. The GDP data for the last three months of last year will also be released later this month, with economists generally expecting a slowdown in private consumption Koike from Sompo stated: "The upward trend in wages has not yet fully translated into actual consumption, mainly because real wage growth has not significantly increased. If real wages achieve stable growth as inflation slows down in the middle of the year, private spending may fully recover from that point onward."