Japanese central bank welcomes good data again! Acceleration in April's basic wage growth may pave the way for interest rate hikes.

The latest wage data released on Thursday in Japan is a positive development for the Bank of Japan, which is seeking further interest rate hikes to advance the normalization of monetary policy. The data shows that in April, Japan's basic wages increased by 2.2% year-on-year, higher than the revised 1.4% in March; nominal wages increased by 2.3% year-on-year, slightly below economists' expectations of 2.6%. A more stable wage trend indicator shows that full-time worker wages rose by 2.5% year-on-year, the 20th consecutive month to maintain at 2% or above (this indicator avoids sampling issues and excludes bonuses and overtime pay). However, a downside is that real wage income decreased by 1.8% year-on-year, greater than the market's expected 1.6% decline. Nominal wage growth is a key component of the virtuous economic cycle that the Bank of Japan has been pursuing for a long time. Japanese authorities are observing whether wage increases will drive demand-driven price increases, using this as a basis for future policy directions. Thursday's data may encourage Bank of Japan Governor Haruhiko Kuroda and his committee to continue considering the possibility of raising interest rates when conditions allow. Toshifumi Umezawa, senior strategist at Pictet Asset Management, said: "Today's data partly reflects the results of this year's labor negotiations, which is a good start. At this level, I think this keeps the Bank of Japan on track." After the annual labor negotiations, wage prospects are generally optimistic. Japanese companies have committed for the second consecutive year to raise wages by over 5%. According to the latest statistics from the largest labor union federation in Japan, Rengo, some workers have received the largest pay raises in over 30 years. According to past studies by the Bank of Japan, these pay raises will be more fully reflected in June's paychecks. However, some economists have warned that President Trump's tariffs may squeeze business profits, limiting some companies' ability to provide more generous wages for employees. The Bank of Japan stated in its latest outlook report that the pace of nominal wage growth may slow in the future due to declining corporate profits, but did not further specify the background. Taro Kimura, an economist at Bloomberg Economics, pointed out that the data in the previous months were affected by leap year effects, which have faded in April, partly boosting this month's data. He said: "Based on the same sample, basic wages for full-time employees - the indicator that the Bank of Japan is most concerned about - have accelerated somewhat, but still not reached the 3% level that Kuroda and others consider consistent with the 2% inflation target. In short, the data seem strong on the surface, but there is no reason in the details to push the Bank of Japan to accelerate the normalization of policy." A key factor driving wage growth is the continuing tight labor market. Japan's unemployment rate has been below 3% for over four years. The Bank of Japan also pointed out that in a situation of labor shortage and limited supply, the speed of nominal wage growth may remain relatively high for a period of time. However, the continuous decline in real wages highlights the stubborn presence of inflation pressure, casting a shadow on the prospects of domestic demand. Japan's inflation rate in April rose to the fastest level in over two years, driven mainly by rising food and energy prices. This trend may continue in the coming months, as leading indicators in Tokyo's inflation data show signs of this. Although nominal wages in Japan have steadily risen over the past four years, real wages have only increased in four of those months. Economists generally expect real wages to remain low for a long time before they begin to stabilize and grow. With the prolonged decline of real wage growth, stagnant disposable income is dampening consumer confidence and weakening household spending, raising concerns that Japan may be heading towards a technical recession. In the first three months of this year, Japan's GDP contracted, mainly due to weak trade and sluggish consumption. The decline in disposable income has also intensified public dissatisfaction, putting pressure on Prime Minister Shinzo Abe as critical elections in the Upper House are scheduled for July. One of the Japanese government's latest measures is a sector-specific minimum wage increase plan aimed at boosting labor productivity by promoting digitization and automation. The plan is a potential path to achieving the goal of raising the minimum hourly wage to 1,500 yen within five years, which means an increase of over 7% per year, with the current minimum hourly wage at 1,055 yen. In the same policy framework, the Abe government has also set a target for the fiscal year starting in April 2029, with actual wage growth reaching 1%. Toshifumi Umezawa said: "Persistent inflation is a disadvantage for the Abe government." He pointed out that the government needs to continue to promote measures to control prices and promote wages, "what they can do now is to keep working on it until the last moment."