Japanese wage growth to surpass inflation for the first time in over 30 years

Japanese wages are expected to grow in real terms in the second half of 2024, marking the first such increase in over three decades, according to Asset Management One.

Wages in Japan are rising at a faster pace than they did in 2023, the investment management firm highlighted in a recent report. In July, average monthly cash earnings rose by 3.6% year-on-year, while the core consumer price index, excluding fresh food, increased by 2.7%.

Real wages in Japan grew by 0.4% year-on-year in July, continuing the positive trend following a 1.1% rise in June.

Economists at Asset Management One believe this wage growth persisted through the summer, despite recent fluctuations in the yen and Japanese equity markets.

“For the past three decades, Japan has experienced minimal price inflation and stagnant wage growth,” said Yuko Iizuka, an economist at Asset Management One.

When wages rise faster than inflation, consumers typically have more disposable income, which can boost economic activity. Iizuka noted that this increased spending could help pull Japan out of its prolonged economic stagnation.

“That stagnation has held Japan back for nearly 30 years, but we’re now seeing a shift,” she added.

Other factors driving long-term wage growth include labor shortages and a potential peak in the yen's weakness against the U.S. dollar. Additionally, Japan’s largest union group announced in March that large companies plan to raise wages by 5.28% in 2024, following the shunto spring wage negotiations. This represents the biggest pay increase in 33 years.

“The effects of the significant wage hikes from the 2024 labor negotiations are now becoming evident,” said the Daiwa Institute of Research.

Daiwa economists, including Keiji Kanda, stated in a recent report that real wages are expected to keep growing due to sustained wage increases, largely driven by the spring negotiations.

“We also anticipate inflation to stabilize at around 2% as wage hikes and price pass-through continue,” Daiwa noted.

However, Iizuka cautioned that uncertainty around Japan’s long-term economic outlook could temper the rise in consumer spending.

“Long-term concerns, particularly among younger generations, may lead many to prioritize saving over spending,” she said.