Japan’s Slower-Than-Forecast Wage Growth Supports BOJ Caution

Wage growth for Japanese workers was slower than expected in August, reinforcing the Bank of Japan’s need to wait for further signs of strength in the labor market before moving toward normalizing policy.

(Bloomberg) — Wage growth for Japanese workers was slower than expected in August, reinforcing the Bank of Japan’s need to wait for further signs of strength in the labor market before moving toward normalizing policy.

Nominal cash earnings for workers rose 1.1% from the previous year, matching the revised figure from the previous month, the labor ministry said Friday. The reading missed economists’ estimate of a 1.5% gain. 

Separate data showed that household spending fell from year-earlier levels for a sixth straight month, another indication that falling real wages are impacting consumer appetite. Still, there were signs that the deterioration in spending may be turning a corner as the decline was the smallest since March.

The lackluster salary growth doesn’t help the central bank’s pursuit of a virtuous cycle of pay and price growth — a prerequisite for policy normalization. Higher pay is also a key policy goal for Prime Minister Fumio Kishida. 

“Today’s data tell us that the BOJ isn’t in a situation where strong consumption can enable the BOJ to move toward normalization before next spring’s wage talks,” said Toru Suehiro, chief economist at Daiwa Securities. “That’s because wage growth continues to lag behind inflation.”

Real cash earnings fell for a 17th month, sliding more than economists expected with a 2.5% decline in August. The figure implies that wage growth is still not keeping pace with ongoing price hikes. Inflation in Tokyo, a leading indicator of nationwide trends, slowed in September but remained clearly stronger than the BOJ’s 2% goal. 

The recent weak yen and higher crude oil prices also heighten the risk of ballooning import costs and re-accelerating inflation.

What Bloomberg Economics Says…

“Worker incomes are falling further behind living costs. Bottom line: The data bode ill for household spending — and reinforce our view that a BOJ pivot away from stimulus is a long way off.”

— Taro Kimura, economist

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Kishida is aiming to facilitate wage growth while easing the impact of inflation on households and businesses. This week the premier vowed to make a surge of wage gains sustainable, in an unusual appearance at  the convention of Japan’s confederation of labor unions.

He is also considering using reserves set aside for responding to the pandemic to encourage companies to raise pay, according to a Kyodo report.

Friday’s data also appeared discouraging given that the strong results from this year’s wage negotiations are likely already largely reflected. Workers at some firms secured historic pay gains of 3.58% earlier this year, and more than 80% of those increases were expected to turn up in their payrolls by mid-August, according to a BOJ report.

The figures were similarly weaker for data that avoided sampling issues and stripped out bonus and overtime payments, concentrating instead on regular workers’ core pay, with their wage growth slowing to 1.8% from 2.4%.

The market is already focused on the next round of annual pay talks, which will soon kick off with labor unions announcing their wage increase goals. Unions of major companies that could drive the moves will likely start disclosing their pay demands toward the end of the year. 

“The BOJ still needs to see whether wage growth will remain unchanged or accelerate further,” said Koya Miyamae, senior economist at SMBC Nikko Securities. They do not need to wait for the results of next spring’s wage negotiations to judge that, “but need to continue watching developments for the rest of this year.”

  • Scheduled pay increased 1.6% in August, accelerating from 1.3% in July.
  • Special payments, which include bonuses, fell 5.4%, sliding for the first time since January.
  • Growth in hourly pay for part-time workers also decelerated.

–With assistance from Isabel Reynolds.

(Updates with more details from the report, economist comments)

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