Wells Fargo Economics expects Japan’s May labor cash earnings to confirm a sustained wage-price cycle, supporting Bank of Japan (BoJ) policy normalization. The report highlights strong Shuntō wage settlements and resilient Gross Domestic Product (GDP), and projects that the BoJ will raise rates by 25 bps in Q3, likely September, taking the policy rate to 1.25% by year-end.

Wages support BoJ tightening outlook

"With Japan’s labor cash earnings for May due next week, the release will offer a fresh read on whether the wage-price cycle remains intact. The Bank of Japan (BoJ) continues to signal conviction in its path toward policy normalization, as April labor cash earnings and ordinary time earnings (the BoJ's preferred gauge of underlying wage momentum) rose 3.6% and 3.3% year over year, respectively."

"This year's Shuntō negotiations delivered another round of strong pay gains, with labor unions securing average wage increases of more than 5% for a third consecutive year, effective from April. Given the limited coverage of union workers and the lagged pass-through from negotiated settlements to realized earnings, wage growth should remain supported in the months ahead."

"While inflation has been soft, the fading of government subsidies and impact of a weaker yen on import prices should contribute to a gradual pickup in inflation. Combined with resilient GDP growth and a solid Q2 Tankan report, a strong wage print would support the case for further tightening. As such, we continue to expect the BoJ to deliver a 25 bps rate hike in Q3 (most likely September), bringing the policy rate to a terminal level of 1.25% by year-end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)