In May, Japan saw real wages fall by 2.9% compared to a year ago. This is the largest drop in almost two years and marks the fifth straight month of decline. Nominal wages increased only by 1.0%, the slowest growth since March 2024. This slowdown is mainly due to an 18.7% drop in special bonus payments, and regular base pay and overtime earnings are also rising more slowly. The wage data has not yet reflected the record salary increases agreed to in this year’s spring labor negotiations. Smaller companies, which often don’t have unions, are slower to raise wages. On a positive note, household spending jumped by 4.7% year-on-year in May, much higher than the expected 1.2% increase and rebounding from a previous 0.1% decline. However, there are worries that upcoming U.S. tariffs on Japanese exports may hurt company profits and future wage growth. This adds pressure on the Bank of Japan as it tries to normalize interest rates. What we see highlights a growing gap between agreed wage increases and what people are actually receiving in their paychecks. The year-on-year decline in real wages, the steepest in nearly two years, shows how inflation is outpacing most workers’ earnings. Special bonuses, usually a cushion during tough times, have decreased sharply by 18.7%. This isn’t just seasonal; base pay and overtime are also increasing slowly when we need stronger earnings the most. It’s essential to recognize that changes at larger firms don’t always happen quickly across the board. Wage agreements from the spring, though record-setting, aren’t immediately applied everywhere. Many smaller businesses, without formal unions, are delaying or reducing raises. This creates uncertainty about domestic demand, even with the recent increase in consumer spending. Speaking of that spending surge, the 4.7% annual rise in household expenditures surprised many. After several weak months, this level of spending indicates more resilience than expected. It may be due to pent-up demand or delayed support measures. However, we shouldn’t rush to see it as a turning point, especially when real incomes are flat or falling. On top of domestic issues, there are rising concerns about external trade pressures. Upcoming tariffs could hit corporate profits so hard that companies may rethink their pay plans. This risk is very real now. When profit margins shrink, wage growth usually slows or even reverses. The Bank of Japan, aiming to gradually raise interest rates, is navigating a complicated situation. The softness in wages combined with increased spending makes it tough to gauge demand-driven inflation. We might see more caution in policy moves, despite some calls for urgency. If tightening hesitates further, it could widen yield differentials, intensifying currency pressures. Some of this widening has already begun. Thus, we should expect volatility in rates and spreads to stay high. Understanding the changing wage landscape and slower-than-expected earnings growth is crucial for framing future policy reactions. We need patience but not passivity; we should remain attentive to the data and not just follow trends.

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