Japan's largest business lobbying group wins a 5%+ salary increase! But the central bank may not shift to a rate hike stance

According to the Zhitong Finance APP, Japan's largest commercial lobbying group has stated that its member companies' employees have secured a commitment to salary increases of over 5% for two consecutive years, indicating that the upward trend in wages among Japanese companies continues amid a worsening labor shortage. For the Bank of Japan, the increase in corporate wages and inflation are the most important reference data for its monetary policy path. With several months of inflation consistently exceeding the 2% target and companies implementing salary increases of over 5% for two consecutive years, market expectations for interest rate hikes by the Bank of Japan have once again intensified.

However, despite the continuous rise in employee wages, Japanese business organizations such as the Japan Business Federation (Keidanren) insist that the pace of consumer price increases (i.e., the CPI index) is outpacing wage growth, and the real income of Japanese residents remains stagnant. Therefore, the Japanese business community is generally calling for the Bank of Japan to adopt a wait-and-see policy to support the continued growth of real wages in Japan under a stable inflation rate of 2%.

A preliminary summary released by Keidanren on Thursday showed that the average salary increase for 620,000 employees from 97 major Japanese companies during this year's spring labor negotiations was 5.38%. Although slightly lower than last year's 5.58%, it is still more than double the average wage increase over the past 20 years (approximately 2.3%).

Statistics show that Keidanren represents over 1,500 Japanese companies and plans to release the final data report on salary negotiations for large Japanese companies by the end of July, along with a separate salary survey report covering the vast majority of small and medium-sized enterprises in Japan.

Continued momentum for salary increases—employees of large Japanese companies have secured a 5.38% wage increase in negotiations (Note: 2025 data is preliminary, others are final reports)

This data further confirms the signs of robust wage growth in Japan's labor market, as previous union surveys have shown that wages have recorded the highest increases in decades for two consecutive years. This is a rare positive development for the Japanese government and policymakers at the Bank of Japan, who are seeking to maintain economic growth momentum amid rising global risks.

On the same day, Keidanren submitted a preliminary statistical report to Prime Minister Shigeru Ishiba during a policy meeting, where topics such as raising the minimum wage and improving productivity were discussed.

The survey report indicates that in 11 out of 17 industries in Japan, the overall salary increase is higher than last year, with the transportation, electronics, and chemical industries leading the wage increases, while traditional manufacturing sectors such as automotive and steel have seen relatively moderate increases.

The key factor driving wage increases is Japan's long-standing severe labor shortage. The unemployment rate in Japan has remained below 3% for four consecutive years, one of the lowest levels among developed countries. A recent survey by Japan's largest credit investigation agency, Teikoku Databank, found that over 50% of Japanese companies are facing a very serious shortage of regular employees Companies are also actively responding to the rising cost of living for employees. Data to be released on Friday is expected to show that inflation in Japan has remained at or above the Bank of Japan's target of 2% for three consecutive years, with the core CPI excluding fresh food expected to rise to 3.4%, a new high in two years.

Due to consumer prices rising faster than wage growth in Japan for an extended period, real income has stagnated, suppressing consumer spending and hindering the formation of a positive economic cycle.

Hidetoshi Nitta, head of the Labor Policy Bureau under the Japan Business Federation, stated, "We hope that real wages can rise alongside productivity improvements, but the reality is that prices remain high. We hope that government institutions such as the Bank of Japan will take appropriate monetary policy measures to maintain continuous growth in real wages under a stable 2% inflation."

Looking ahead to the future of the Japanese labor market, Nitta pointed out that wage growth is likely to continue on an upward trajectory, but it largely depends on the overall economic situation in Japan. One major risk is the negative impact of U.S. tariff policies on Japanese corporate profits; in particular, Japanese automobile exports to the U.S. face a 25% tariff, with about 8% of domestic employees working in companies related to this industry.

In addition, for the Bank of Japan, the recent sharp rise in Japanese government bond yields, especially for long-term bonds with maturities of 10 years or more, is also constraining the space for the Bank of Japan's interest rate hike policy. On Thursday, the yield on Japan's 40-year government bonds rose by 6 basis points to 3.675%, reaching the highest level since issuance began in 2007.

The recent rise in yields on Japanese government bonds with maturities of 10 years or more to multi-year highs is squeezing the borrowing costs for banks and companies as well as the sustainability of government debt, effectively narrowing the Bank of Japan's room for further interest rate hikes and balance sheet reduction. Higher long-term bond yields are, on one hand, "doing part of the tightening work" for the central bank, while on the other hand, if the rise in long-term yields becomes uncontrollable, it could increase government interest expenses, impact the valuation of financial system holdings, and lead the Bank of Japan to significantly delay or slow down its pace of interest rate hikes and debt reduction