Historic wage increase! Japan's minimum wage raised by 6.3%, strengthening the central bank's interest rate hike signal

Japan has decided to implement a record increase in the minimum wage, a move that not only strengthens the positive cycle between wages and prices in the country but also provides new support for the Bank of Japan to further raise interest rates.

According to a statement from Japan's Ministry of Labor on Friday, the average minimum hourly wage across all prefectures will be raised by 66 yen this fiscal year, an overall increase of 6.3%, bringing the new hourly wage level to 1,121 yen (approximately $7.56). This is the largest increase recorded since 1978, and the new standard will gradually take effect from October this year, affecting about three million workers.

This decision is expected to directly drive consumer prices further upward. On one hand, employers may pass the rising labor costs onto consumers; on the other hand, the increase in workers' income will boost consumer spending, thereby solidifying the demand-driven inflation cycle that the Bank of Japan has long sought.

Given that Japan's core CPI has remained at or above the central bank's target level of 2% for more than three consecutive years (with the latest data at 3.1%), this pay raise further strengthens market expectations for interest rate hikes, prompting investors to bring forward the timing of the next policy adjustment.

Supporting Inflation, Heightened Rate Hike Expectations

The significant increase in the minimum wage adds fuel to the already high inflation and directly increases the pressure on the Bank of Japan to adopt tightening policies. Takuya Hoshino, chief economist at Dai-ichi Life Research Institute, stated:

“Food-related industries such as supermarkets, convenience stores, and restaurants will be hit the hardest, as they heavily rely on part-time employees paid at the minimum wage. This pay raise may prolong food-driven inflation, thereby pushing the Bank of Japan towards further interest rate hikes.”

However, the pay raise brings operational pressure to small and medium-sized enterprises. According to a report released by Tokyo Shoko Research in July, the number of companies going bankrupt due to labor shortages reached a record 172 in the first half of 2025, with many companies stating that they lost employees because they could not sufficiently raise wages. Ken Kobayashi, chairman of the Japan Chamber of Commerce and Industry, stated:

“If the increase is too large, businesses will be harmed. Some companies may exit the market, leading to a collapse of infrastructure.”

Recently, the Bank of Japan unexpectedly raised its inflation expectations significantly, triggering intense speculation in the market about the timing of the next interest rate hike. Nomura believes that if the government led by Shigeru Ishiba can last until October, the likelihood of an interest rate hike will be higher. Conversely, if the ruling Liberal Democratic Party holds an early leadership election and leads to a change in government, the Bank of Japan will need time to assess the policy intentions of the new cabinet, likely delaying the interest rate hike decision.

External Headwinds, Long-term Goals Face Challenges

Even with this record increase, Japan still faces challenges in achieving its long-term wage goals, especially from external economic headwinds Japanese Prime Minister Shigeru Ishiba once promised to raise the national minimum hourly wage to 1,500 yen in the 2020s, which means that a growth rate of over 7% must be maintained each year in the future. However, it will be very difficult to sustain this year's growth pace, with one major drag being U.S. President Trump's tariff policy.

Exporters, including automobile manufacturers, have already felt pressure on profits. Previously, Toyota Motor Corporation warned that U.S. tariffs would impact its profits by 1.4 trillion yen. In the three months ending in June, the pre-tax profits of transportation equipment manufacturers fell by 29.7% year-on-year.

In the nationwide wage increase wave in Japan, some regions' proactive explorations have provided valuable experiences. Tokushima Prefecture's minimum wage increase last year reached 9.4%, ranking first among the 47 prefectures nationwide. The local government provided a subsidy of 50,000 yen per formal employee to small businesses that promised to raise the minimum hourly wage from below 930 yen to 980 yen. Tokushima Prefecture Governor Masazumi Gotoda stated in a media interview last month:

“This is the result of the unremitting efforts of both labor and management to improve productivity.”

Thanks to higher wages, Tokushima Prefecture's real wages have increased for 11 consecutive months, while nationwide real wages only saw their first annual increase in July this year. Gotoda noted that higher compensation has also attracted foreign workers who previously flowed to neighboring prefectures. This year, Tokushima Prefecture decided to raise the minimum wage again by 6.7%, breaking the 1,000 yen mark for the first time.

Despite the record increase, Japan's minimum wage remains relatively low among major global economies. In contrast, Germany's minimum hourly wage is about 12.82 euros (approximately 2,217 yen), Canada's is 17.75 Canadian dollars (approximately 1,906 yen), and France's is 11.88 euros (approximately 2,055 yen). Gotoda emphasized that Tokushima Prefecture is preparing to create a "Battery Valley" and must raise wages to a globally competitive level to attract high-skilled foreign talent