(Bloomberg) — Japan’s latest wage figures showed pay gains have now lagged inflation every month for two years even as a measure of the deeper trend points to steady growth.
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Real wages fell 2.5% from a year earlier in March, marking the deepest drop in four months and running the streak of declines to exactly 24 months, the labor ministry reported Thursday. The consensus estimate was for a 1.4% decrease. Growth in nominal cash earnings for workers slowed to 0.6%, also missing forecasts.
The slowdown in nominal wages was exacerbated by a 9.4% drop in bonuses. Data for full-time workers that avoid sampling problems and exclude bonuses and overtime pay grew by 2.3%. This index, which is watched closely by the Bank of Japan, remained at or above the 2% threshold for a seventh month, in a sign of steady underlying salary growth.
“This time, bonuses had a strong impact on the data, but scheduled pay is solid and I think wages are on an uptrend,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “I expect real wages to turn positive in the second half of this year.”
Gains in pay are expected to accelerate in the new fiscal year after the nation’s largest umbrella group for unions secured commitments from large companies to increase pay by more than 5%, the largest increase in three decades, and a pace that would easily exceed inflation. Those increases will gradually be reflected in workers’ paychecks from April through the summer, according to a BOJ report.
The nation’s chronic labor shortages point to continuing solid pay trends ahead. The nation’s unemployment rate is 2.6%, the lowest among advanced economies, and more than 50% of surveyed businesses reported facing a shortage of full-time employees in April, according to a report by Teikoku Databank.
Read more: Japan Union Group Wins Largest Pay Hike in More Than 30 Years
In the latest outlook report, the BOJ said “relatively high wage increases are likely to be achieved in this year’s annual spring labor-management wage negotiations, in view of factors such as the need to recruit and retain employees, with labor market conditions tightening.”
The bank is watching wage trends for signs that a virtuous cycle linking rising wages to demand-led price growth is underway, a key consideration as it mulls whether to raise rates again after having conducted the bank’s first rate increase in 17 years in March. Governor Kazuo Ueda has said he’s hopeful an increase in real wages will spur personal spending.
What Bloomberg Economics Says…
“Gauges that tally same-sample wages show stronger pay gains backed by faster base-pay rises. This suggests wages are continuing to go in the right direction for the central bank, which expects a virtuous wage-price cycle to bolster inflation. We expect the BOJ to move toward policy normalization by hiking rates modestly in the second half of the year.”
— Taro Kimura, economist
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“The key question is how wage hikes will affect consumption,” Taguchi said. “As real wages have been negative for such a long stretch, consumers may stay cautious about spending for a while even after they turn positive.”
In recent months, the failure of wage growth to keep up with inflation has exerted a steady drag on economic growth. The 24-month decline in real wages is the longest slump in data going back to 1991, and prices continue to rise.
The nation’s key price gauge rose by 2.6% in March, meeting the BOJ’s 2% inflation target for two full years. The potential for an acceleration of inflation due to the persistently weak yen has prompted widespread concern among officials and business leaders who fear the impact on households’ propensity to consume.
Consumer confidence unexpectedly declined in April, with a gauge showing the willingness to buy durable goods sliding to the lowest since December. Household spending has fallen from a year earlier for 12 straight months, with data due Friday expected to extend that streak for another month.
Ueda said at the post-decision press conference last month that a recovery in consumption will be a key point in future policy deliberations.
(Adds economists’ comments)
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