The wage increase in July reached its highest level since 1997, and the GDP growth rate for the second quarter has been revised upward! The reasons for the Bank of Japan's interest rate hike this month have been further strengthened.

Japan's wage growth reached its highest level since 1997, and the revision of the country's economic growth rate for the second quarter further strengthened the market's widely held expectation of a Bank of Japan interest rate hike next week. Data released by Japan's Ministry of Health, Labour and Welfare on Tuesday showed that nominal wages in July rose by 4.7% year-on-year, accelerating from June's revised 4% increase. This growth rate is the largest since 1997, far exceeding the economists' forecast of 3.8%, and marks the sixth consecutive month of gains exceeding 3%, setting a record for the longest continuous growth in 34 years. Adjusting for inflation and excluding rental impacts, real wages rose by 2.4%, the largest increase in nearly five years; base wages also climbed by 4.1%. A more stable measurefull-time employee wages excluding bonuses, overtime pay, and sampling biasrose by 2.7%. Japan's nominal wage growth is the fastest since 1997. Part of the wage increase results from another round of strong annual labor negotiations. Corporate employees affiliated with the Japanese Trade Union Confederation (Rengo) received over 5% wage increases for the third consecutive year. Additionally, the national minimum wage for the current fiscal year has risen to an average of 1,177 yen (about $7.55) per hour, the second largest increase on record, indicating that the momentum of wage growth is spreading to a broader range of workers and industries. The ongoing labor shortage has further increased pressure on companies to raise wages. According to a survey published last month by Teikoku Databank, most companies reported a shortage of full-time employees, particularly in the finance, construction, and logistics sectors. Healthy corporate profits have helped companies absorb higher labor costs. In the three months ending June, Japan's recurring corporate profits rose for the seventh consecutive quarter, with manufacturers being a significant driving force due to the booming demand for artificial intelligence (AI) and data centers. The latest data aligns with the Bank of Japan's assessment of wage trends. In its latest economic outlook, the Bank of Japan anticipates that nominal wages will continue to grow at a pace close to the current level as the labor market remains tight. Meanwhile, a report released by Japan's Cabinet Office on Tuesday showed that the country's GDP grew at an annualized rate of 1.4% in the second quarter, an upward revision from the previously announced 1.1% initial estimate, but below the median economist forecast of 1.8%. New data included in this period indicated that business fixed investment drove the GDP growth revision. Business fixed investment declined by 0.9% from the previous quarter, while preliminary data had indicated a decline of 1.2%. These two sets of stronger-than-expected data further support the widespread anticipation of an interest rate hike by the Bank of Japan next week. The market has largely priced in the likelihood of an impending rate hike by the Bank of Japan. Some investors expect that after this hike, the Bank of Japan may further tighten its policy in a relatively short timeframe. Whether the Bank of Japan can maintain its tightening path partly depends on whether income growth can stronger domestic demand. However, this point remains uncertain at present. Data released last week showed that due to consumers cutting back on non-essential spending, Japan's household expenditures fell for the eighth consecutive month in July. Earlier published GDP data for the second quarter indicated that private consumption was essentially stagnant during that quarter. The ability of wage growth to more consumption partly depends on whether wage increases outpace the rising cost of living. Continuous increases in daily living expenses have made households cautious. Another report from Teikoku Databank revealed that nearly 5,000 food and beverage products are planned to increase in price in September, three times more than a year ago. Factors driving the price hikes include rising crude oil and naphtha prices due to conflicts in the Middle East, as well as a weak yen. The Bank of Japan is highly likely to raise interest rates this month. In addition to the two sets of latest data released on Tuesday, a series of previously published data has also supported the Bank of Japan's interest rate hike this month. Data released at the end of August showed that despite efforts by the Japanese government to reduce energy costs, Tokyo's key inflation indicator accelerated for the third consecutive month. The consumer price index (CPI) in Tokyo, which excludes fresh food, rose by 1.8% year-on-year in August, slightly up from July's increase of 1.7%, aligning with the median forecast of economists surveyed. Tokyo's inflation data is typically seen as an important leading indicator of national price trends in Japan. The core CPI, excluding fresh food and energy, rose by 2% year-on-year, while the overall CPI also increased by 1.9%. The main drivers of inflation include higher costs for durable goods related to education and recreation, as well as medical expenses; significant increases in rent and restaurant costs were also noted. Furthermore, Japan's CPI, excluding fresh food, rose by 1.8% year-on-year in July, accelerating from the previous month's 1.6%, marking the second consecutive month of accelerated growth; the core CPI, excluding fresh food and energy, increased by 1.9%, and the overall CPI also rose by 1.9%; service prices, a key indicator of inflation persistence, rose by 1.2%, slightly accelerating compared to June. According to informed sources, the Bank of Japan is inclined to raise the benchmark interest rate by 25 basis points this month to address the risks of rising prices, while not ruling out the possibility of accelerating the pace of rate hikes subsequently. Sources stated that they still believe the inflation risk is tilted to the upside, as rising service prices and the continued weakness of the yen have reinforced the rationale for action. Sources also revealed that Bank of Japan officials' views on economic development are largely consistent with expectations. One source mentioned that there has not been a significant change in the situation, hence there is no need for larger-scale rate hike measures, such as a 50 basis point increase, which lowers the likelihood of significant rate hikes. Additionally, sources disclosed that the Bank of Japan is aware that further rate hikes may be necessary after September and indicated that it will flexibly adjust the pace of rate hikes based on economic developments and inflationary risks. This means that if circumstances require, the Bank of Japan does not rule out the possibility of accelerating the pace of rate hikes. Swap market data shows that the market has fully priced in a 25 basis point rate hike by the Bank of Japan before September, and expectations for another rate hike before January next year have also been fully reflected in prices. Bank of Japan Governor Kazuo Ueda has indicated that taking action at this month's meeting is possible; while one of the most hawkish members of the policy committee, Takeda Hajime, has not ruled out the possibility of a significant or consecutive rate hikes. It is worth noting that Nomura Securities recently pointed out that if the pressure for yen depreciation continues to intensify, the Bank of Japan may, in extreme scenarios, raise interest rates consecutively three times before December this year. Nomuras forex strategy chief, Yujiro Goto, stated in an interview that a 25 basis point rate hike this month "seems reasonable," and that "if the yen weakness continues towards the 160 level, the possibility of consecutive rate hikes in October and December cannot be ruled out." Three consecutive rate hikes would represent an unusually aggressive tightening pace for a central bank that has fought deflation for the past thirty years and kept borrowing costs near zero. Yujiro Gotos baseline expectation is relatively moderate. He believes it is reasonable and necessary for the Bank of Japan to raise rates at least once every quarter in the future, maintaining the current target for the yen to dollar exchange rate at 154. Yujiro Goto further noted that the government's stance on monetary policy may become a key variable for the yen's sustained strength. Investors are closely monitoring signals from Prime Minister Kishi Hirotowho has previously held back on supporting rate increasesas the market hopes to understand whether she endorses further tightening of policy by the central bank.