A Japanese 10,000 yen banknote is lined up in Kyoto, Japan, Thursday, Nov. 2, 2023.
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Real wages in Japan fell for a 23rd straight month, suggesting high inflation is still weighing on spending power in the country.
Data from the Ministry of Labour released on Monday showed real wages fell 1.3% in February from a year earlier, accelerating from a revised 1.1% drop in January. Special payment
On a nominal basis, however, wages rose by 1.8%, with the basic pay component rising by 2.2%. The figures showed that special payments, which include bonuses, fell 5.5% year-on-year.
The figures come after Japan’s unions secured their highest wage increases in 33 years. But these wage increases benefit only a fraction of Japan’s workers, given that only 16.3% of workers are unionized in the country and most unionized workers are concentrated in large companies.
This suggests that any “virtuous circle” between wages and prices could be narrowed as workers in small and medium-sized businesses face higher prices amid stagnant wages.
Inflation has exceeded the Bank of Japan’s 2% target every month since April 2022. If real wages continue to fall, consumers may choose to save rather than spend, creating little demand and pushing up prices .
No return to NIRP and YCC
Union wage increases could be reduced and widened, Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation and head of its research group, told CNBC. He noted that this year’s wage increases have also been relatively strong and appear to be in line with the Bank of Japan’s virtuous cycle.
Suzuki said the latest data from the Japan Confederation of Trade Unions, also known as Rengo, estimated nominal wage growth of 3.2 percent for SMEs, not far from 3.7 percent for large firms.
The Bank of Japan regional economic assessments for April it also reported that the employment and income situation in eight of Japan’s nine regions had “modestly improved.”
Even if real wages do not rise, Suzuki said the BOJ is unlikely to revive negative interest rate or yield curve control policies because the current inflation environment is different from the past.
Moving forward, Suzuki said indicators for investors to watch include data on inflation, wages and consumption, especially in June and July.
Almost every fiscal year of every Japanese company starts on April 1st. As a result, it tends to be a date for important announcements, including salary increases.
Economists will be watching to see if the increases actually translate into higher real wages and boost consumption. The monthly wage report is one of the key considerations when the Bank of Japan sets monetary policy.
When the BOJ ended its negative interest rate policy last month and scrapped its yield curve control policy, the central bank said “recent data and anecdotal information have gradually shown that the virtuous circle between wages and prices has become more stable.”
The BOJ also predicted that the 2% “price stability target” would be achieved in a sustainable and stable manner towards the end of 2024.
Therefore, Suzuki expects the Bank of Japan to wait until early autumn before making further changes to its monetary policy. SMBC expects the next rate hike to take place in October.