Japan’s largest union group, Rengo, reported a final average wage increase of 5.25% for this fiscal year. This is a slight drop from the earlier data, which had suggested a 5.40% rise. Even though the final number is lower, it’s still above the 5.10% wage increase expected for fiscal year 2024. This is notable because it’s the second year in a row that the average wage increase is over 5%.

Labour Market Trends

This update shows that the labour market continues to tighten, leading to ongoing wage pressures that may affect prices in various sectors. Although the revised figure is lower than earlier forecasts, it indicates that companies are responding to strong employee demands amidst rising inflation. Importantly, we see consistent increases—this isn’t just a one-time occurrence, but the second consecutive year exceeding 5%, suggesting that upward wage growth remains strong. For those making decisions based on future rates, this wage data fits into a broader context of strong domestic demand and steady income growth. With employees likely to feel confident in their bargaining power, consumer spending should hold up even if external demand signals are mixed. We might also see some companies protecting their profit margins by passing on higher payroll costs instead of absorbing them, especially in sectors where they can set prices. Prime Minister Kishida’s ongoing push for real wage increases, backed by central bank policies over the past few months, shows in these numbers. While the Bank of Japan has kept its policies steady, wage growth above their prior benchmarks for sustainable inflation might limit their ability to maintain this stance. If pay raises continue at this pace in the next salary negotiation cycle, it could align inflation targets more closely with policy changes.

Policy Implications

Yamamoto hinted earlier this month about potential action if real wages catch up with nominal trends. If companies see these wage increases as long-lasting, those tracking policy should pay attention to how this affects medium-term expectations, especially regarding breakeven rates. Current earnings reports in Q2 will be crucial; if they show not just wage increases but also stable employment, the main economic story is unlikely to change. Looking ahead, market positioning in yen-denominated assets may experience different conditions by Q3. Changes in interest rate differences, driven by domestic monetary policies, would require more careful hedging strategies. This means that expectations built into swap curves and rate futures might be misaligned, especially if the current wage trend becomes a lasting feature. Traders should monitor any volatility discrepancies over the next two expiration cycles closely when timing their entries or adjusting exposure. Traders should view this as a prompt to refine how labour data influences short-term macro views. Create your live VT Markets account and start trading now.

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