Japan’s nominal wages increased more than expected in February, offering a bright spot in an otherwise uncertain economic outlook. According to data from the labour ministry, nominal cash earnings rose by 3.1 percent compared to the previous year, surpassing the forecast of a 3 percent increase. This marks an acceleration from a revised 1.8 percent rise in January.
However, real wages, adjusted for inflation, fell for the second consecutive month, declining by 1.2 percent from the previous year. Despite the wage growth, persistent price pressures continue to challenge workers’ purchasing power.
Consumer prices, excluding fresh food, are expected to show growth at or above the Bank of Japan’s (BOJ) 2 percent target for a full three years by the end of March. The steady increase in wages had previously been a contributing factor in the BOJ’s approach to gradually raise interest rates. However, this trajectory was disrupted last week when US President Donald Trump announced a 24 percent tariff on Japanese goods, leading economists to revise their growth forecasts for Japan and delay anticipated rate hikes. The BOJ now expects rate increases to occur no earlier than September.
Despite the uncertainty caused by trade tensions, wages are expected to continue rising throughout the year, bolstered by strong results in the latest round of annual labour negotiations. Japan’s largest labour union federation, Rengo, reported an average pay increase of 5.42 percent, the highest in over 30 years, surpassing the anticipated 5 percent. Small firms also saw a 5 percent rise, the largest since 1992, which suggests that wage growth is broad-based.
A tight labour market, with Japan’s unemployment rate remaining at a low 2.4 percent in February, is contributing to wage pressure as employers compete to attract and retain workers. Last year, a record number of companies, 342, went bankrupt due to a shortage of workers. The BOJ has predicted that nominal wage growth will persist, driven by labour constraints.
However, rising consumer prices are complicating matters for workers, leading to increased demands for higher wages. In April, over 4,000 food products saw price hikes, the highest number since October 2023. While wages are increasing, inflation is eroding real incomes, posing challenges to the government’s efforts to stimulate domestic demand.
Japanese households reduced their spending for the first time in three months in February, indicating growing caution among consumers. As Japan approaches a key election this summer, Prime Minister Shigeru Ishiba faces mounting pressure to address both economic and diplomatic concerns. In response to US tariffs, he has pledged to protect domestic industries and jobs while seeking an exemption from the US.
To support the economy, Ishiba’s government has introduced several measures aimed at easing cost pressures and raising incomes, including extended petrol subsidies and income tax cuts. Additionally, the government aims to raise the minimum wage, with a target of reaching 1,500 yen per hour within five years, a plan that would require annual increases of over 7 percent from the current rate of 1,055 yen.
A more stable measure of wages showed base pay for full-time workers increasing by 1.9 percent, a slowdown from previous months and the first time in 18 months that the rate fell below 2 percent.
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