Wages recorded the strongest growth in seven months! The probability of the Bank of Japan raising interest rates in October has increased significantly

According to the latest statistics obtained by Zhitong Finance APP, nominal wages for Japanese workers have grown at the fastest pace in seven months, while real wages have seen their first increase this year. These signs support the rationale for the Bank of Japan to consider restarting the interest rate hike process in the coming months, possibly as early as October.

The Japanese Ministry of Health, Labour and Welfare reported on Friday that nominal wages in Japan increased by 4.1% year-on-year in July, significantly up from the revised 3.1% in June, surpassing economists' forecast of a 3% increase and marking the largest increase since December of last year. Real cash earnings also saw their first year-on-year rise in seven months, growing by 0.5%, better than the market consensus expectation of a decline of 0.6%.

Basic wages rose by 2.5%; a more stable indicator (to avoid sampling issues and excluding bonuses and overtime pay) showed that salaries for regular employees increased by 2.4%.

The data released on Friday indicates that the momentum of wage growth continues. Japan's largest labor union federation has secured commitments for wage increases of over 5% from Japanese employers for two consecutive years. This year's wage increase negotiated by Japan's largest union is the largest in 34 years and is now largely reflected in compensation.

"The results of this survey indicate that the domestic economy in Japan is at least on a positive trajectory," said Hiroshi Okazaki, chief market economist at Nomura Securities. "This enhances confidence that domestic demand will remain robust even in the face of potential external shocks."

This data will strengthen market expectations that the Bank of Japan will raise its benchmark interest rate again this year. Economists generally expect the Bank of Japan to maintain its current interest rate setting at the next policy meeting on September 19, but many believe that a rate hike of 25 basis points could occur as early as October.

For the Japanese government bond market, the rising expectations of interest rate hikes could trigger a large-scale sell-off of Japanese government bonds, potentially leading to a sustained surge in yields on long-term Japanese government bonds (10 years and above).

Since the beginning of this year, the Bank of Japan has significantly reduced its large-scale bond purchasing program, coupled with global investors' concerns over the Japanese government's massive spending and the possibility of the Bank of Japan restarting interest rate hikes soon, pushing long-term Japanese government bond yields to multi-year highs. If unexpected economic data continues to catalyze rising expectations for interest rate hikes, some strategists are beginning to worry that a "sell-off storm" in Japanese government bonds could once again spread to global financial markets, leading to turmoil in global stocks and bonds.

Bank of Japan Deputy Governor Norihiro Nishikawa reiterated the established monetary policy path of raising the benchmark interest rate when conditions permit, while avoiding any hints about when a rate hike might occur. Overnight index swaps indicate that traders are betting on a slightly over 70% probability that the Bank of Japan will restart interest rate hikes before the end of the year, highlighting that most traders are betting on the imminent restart of the interest rate hike cycle by the Bank of Japan "These data are generally consistent with our judgment, and the Bank of Japan is expected to raise interest rates by 25 basis points in October. That said, considering the cautious sentiment regarding the potential drag on Japan's economic growth from higher U.S. government tariffs affecting exports, there remains a risk of delaying the rate hike for some time," said Taro Kimura, a senior economist at Bloomberg Economics.

Bank of Japan Governor Kazuo Ueda reiterated on Wednesday that the central bank would take action if price levels and economic performance align with market expectations. Data set to be released on Monday is expected to confirm that the Japanese economy achieved growth for five consecutive quarters in the three months ending in June.

Sustained wage growth is a key component of the Bank of Japan's vision for a "virtuous cycle"—where wage increases drive consumption, paving the way for demand-driven price increases.

It is worth noting that the latest wage statistics were supported by strong summer bonuses, which increased by 7.9% compared to June. With the country's largest automakers facing President Donald Trump's tariff onslaught, the sustainability of these variable bonuses is uncertain, particularly as automakers have been hit hard. Trump signed an executive order on Thursday to implement the trade agreement reached between the two countries in July. Under this agreement, U.S. tariffs on imported Japanese cars will be significantly reduced from the current 27.5% to 15%.

Japanese manufacturers previously saw a 11.5% decline in pre-tax profits during the April to June period, with transportation equipment manufacturers experiencing a substantial drop of 29.7%. So far, Japan's largest automakers have borne most of the tariff impact, sacrificing profit margins to maintain market share.

Toyota Motor Corporation recently warned that tariffs would have a significant impact on its profits, amounting to 1.4 trillion yen (approximately $9.4 billion). If profits continue to be under pressure, it remains unclear how much room manufacturers will have to raise wages in the future.

"Even if part of the increase comes from bonuses, income is indeed rising significantly," said Kohei Okazaki. "I believe we are beginning to see signs of healthy wage growth (albeit gradually), and this is starting to connect with consumption."

Currently, higher wages seem to be translating to consumer spending at a moderate pace. Japanese household consumption rose by 1.4% year-on-year in July, marking an increase for three consecutive months, primarily driven by spending on transportation and communication. To further stimulate demand, Prime Minister Shigeru Ishiba is reportedly set to instruct the preparation of a package of economic stimulus measures this week, which includes distributing 20,000 yen in cash.

It is understood that private consumption in Japan has contributed positively to overall economic growth for five consecutive quarters.

However, doubts remain about Ishiba's government's ability to implement stimulus measures. He faces calls to step down under pressure from some party members after the Liberal Democratic Party suffered another setback in the parliamentary elections under his leadership. The party is expected to vote on Monday to decide whether to hold an early leadership election, which would effectively lead to Ishiba's resignation.

Despite gradually cooling, sticky inflation continues to trouble Ishiba's government. Public dissatisfaction with soaring living costs was a significant factor in the Liberal Democratic Party's defeat in the July Senate elections, causing the ruling coalition to lose its majority in both houses Looking ahead to future salary prospects, salary dynamics within Japan may continue to be polarized. The ongoing labor shortage may exert upward pressure on compensation as companies compete for talent. However, the outlook for exporters is overshadowed by global business headwinds triggered by U.S. trade policies. Japan's export data has declined for three consecutive months, with the drop in July being the largest in four years