Real wages in Japan fell for the twenty-third month in a row

Real wages in Japan fell for the 23rd straight month, indicating that high inflation is still affecting the purchasing power of consumers in the country.

Labor Department data released Monday showed real wages fell 1.3% in February from a year ago, accelerating from a revised 1.1% decline in January. Special payment

However, wages on a nominal basis rose by 1.8%, with the basic wage component rising by 2.2%. The data showed that special payments, which include bonuses, fell by 5.5% year-on-year.

This data comes after Japanese unions received their highest wage increases in 33 years. But these wage increases benefit only a small portion of Japanese workers, given that only 16.3% of workers belong to unions in the country, and most unionized workers are concentrated in large companies.

This suggests that any “virtuous circle” between wages and prices could be limited because workers in small and medium enterprises 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, thus generating little demand and momentum to raise prices.

Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation and head of its research group, told CNBC that wage increases for unionized workers could expand and expand. “Wage increases this year have been relatively strong, and appear to be in line with the Bank of Japan's virtuous cycle,” he noted.

The latest figures from the Japan Federation of Trade Unions, also known as Renju, estimate nominal wage growth of 3.2% for small and medium-sized companies, not far from 3.7% for large companies, Suzuki said.

The Bank of Japan's April regional economic assessments also indicated that the employment and income situation in eight of Japan's nine regions is “moderately improving.”

Even if real wages do not rise, Suzuki said the Bank of Japan is unlikely to revive negative interest rate or yield curve control policies because the current inflation environment is different from the past.

Going forward, Suzuki said indicators investors should monitor include inflation, wages and consumption data, especially in June and July.

Almost every Japanese company's fiscal year begins on April 1. As a result, this day tends to be a time for major announcements, including pay increases.

Economists will be watching whether the increases actually translate into higher real wages and boosted consumption. The monthly wage report is a key consideration when the Bank of Japan formulates monetary policy.

When the Bank of Japan 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 cycle between wages and prices has become more solid.”

The Bank of Japan also expected that the 2% “price stability target” would be achieved in a sustainable and stable manner by the end of 2024.

As such, Suzuki expects the Bank of Japan to wait until early fall before making any further changes to its monetary policy. SMBC expects the next rate hike to take place in October.