Difficult times: Ishiba greets supporters at a campaign speech in Yokohama. With Ishiba’s coalition already running a minority in the lower house, losing its grip on the upper house will further complicate the decision-making process. — Bloomberg
TOKYO: Japanese workers’ real wages dropped by the most since September 2023 as inflation continued to outpace salary growth, posing a growing problem for Prime Minister Shigeru Ishiba ahead of a key election taking place in about two weeks.
Real wages declined 2.9% from a year earlier in May, compared to economists’ consensus call of a 1.7% fall, the Labour Ministry reported yesterday.
Nominal wages rose 1% from the previous year, limited by smaller bonuses, and climbed at a much slower pace than economists expected.
While the drop in real wages showed the pain being felt by voters heading into the election on July 20, the strength in underlying wage trends keeps the Bank of Japan (BoJ) on a path of mulling further interest rate hikes.
The sharp drop in real wages highlights the persistent strength of inflation and presents a headache for the minority ruling coalition ahead of the upcoming upper house election.
With prices continuing to rise faster than wages, public frustration has grown, pressuring political leaders to come up with more convincing strategies to alleviate the cost-of-living squeeze.
“In the ongoing election campaign, candidates often cite real wage figures from this monthly report,” said Sota Takano, senior economist at Itochu Research Institute.
“Today’s release suggests people are struggling with the cost of living – that’s a discouraging result for Ishiba.”
Japan’s key inflation rate stood at 3.7% in May, well above the BoJ’s 2% target, driven by broad increases across essentials, from food to service fees.
With the election just two weeks away, Ishiba’s Liberal Democratic Party has pledged a 20,000 yen cash handout per adult, along with additional initiatives to spur wage growth.
However, recent opinion polls suggested the one-off boost isn’t popular among voters, many of whom are leaning towards opposition party proposals of cutting the sales tax.
On the monetary policy front, while weak real wages remains a concern, ongoing nominal pay increases may provide the BoJ with room to consider proceeding with further rate hikes.
The central bank is closely monitoring wage and price dynamics as it evaluates the timing of its next move amid global tariff uncertainty.
Yesterday’s report showed base pay increased 2.1%, while a more stable measure that avoids sampling problems and excluded bonuses and overtime showed wages for full-time workers climbed 2.4%, staying at or above 2% for two years.
The BoJ’s next policy decision is due on July 31, with markets broadly expecting the central bank to maintain its benchmark rate at 0.5%.
“Under the hood of a surprisingly slower headline gain in Japan’s labour cash earnings in May, details suggested wage growth remained solid,” said Bloomberg economist Taro Kimura.
“Swings in special cash earnings, such as discretionary payments, and fewer working days in broad sectors – likely due to calendar effects – dragged on the headline gains.”
Looking ahead, wage momentum is expected to remain strong following robust outcomes from this year’s spring wage negotiations.
Workers secured an average pay hike of 5.25%, the largest in 34 years, according to the final tally by Rengo, the country’s largest labour union federation.
These gains, which cover roughly 10% of Japan’s workforce, are likely to become more visible in payroll data over the summer.
A major driver of current wage growth in Japan is chronic labour shortage, which is prompting companies to raise salaries to attract and retain talent.
Rengo’s data showed that sectors such as the information industry saw the highest pay increases, reflecting an acute lack of software engineers.
US tariffs, however, also pose a risk to wage momentum, as higher levies could squeeze corporate profits and limit employers’ capacity to continue raising wages.
In its latest outlook report, the BoJ warned that US tariffs could particularly affect large manufacturers, which typically set the tone for nationwide wage negotiations.
“There’s little doubt that manufacturers such as automakers are set to face a tougher situation,” said Takano.
“While pay gains appear to be on track this financial year, we need to be cautious whether businesses can maintain the same level of pay hikes in the next round of talks.” — Bloomberg
