Downplaying the Decline in Japan's Real Wages: Will the Bank of Japan Hike Interest Rates Earlier?

TradingKey - Although Japan's real wages have declined after two consecutive months of growth, the outlook for wage increases remains positive. This year's spring wage talks are expected to result in the largest wage increase in more than three decades again, and the yield on 10-year Japanese government bonds has risen to its highest level since 2008.

On Monday, March 10, Japan reported that the basic wage in January increased by 3.1% year-on-year, marking the largest increase since October 1992. However, real wages adjusted for inflation, decreased by 1.8% year-on-year, compared with a 0.3% year-on-year increase in December.

Although higher inflation may dampen future consumption, overall wages growth in Japan still remains strong, bolstering expectations that the Bank of Japan may further raise interest rates.

Economists forecast that Japan's household spending in January will increase by 3.7%, the largest increase since August 2022. This suggests that, the impact of inflation on consumption may be limited.

On the 10th, yields on 10-year Japanese government bonds rose to 1.575%, the highest level since 2008.

The Bank of Japan implemented its third interest rate hike in January following the end of the negative interest rate policy last year. While the market widely expects no action at the March meeting, speculation is growing over potential moves at the May policy meeting.

Bank of Japan officials are inclined to keep interest rates unchanged in May. However, with the results of Japan's spring labor talks are about to be released, traders are betting on an 85% probability of a rate hike before July, while a hike before September has already been fully priced in.

Japan's largest labor organization stated last week that this year's wage increase could reach6.09%, making the largest increase in more than 30 years.

Experts noted that expectations are already building that the Bank of Japan may raise interest rates sooner than anticipated, making the policy decision in May unlikely to be smooth sailing.