Japanese Wages Set to Outpace Inflation for First Time in 30 Years, Asset Management Firm Reports

For the First Time in Decades, Japanese Wages Expected to Grow in Real Terms

Japanese workers are on track to experience real wage growth in the latter half of 2024 for the first time in over 30 years, according to a recent report by Asset Management One. This anticipated shift comes as a significant economic milestone for Japan, where stagnant wages and minimal inflation have long been the norm.

Real Wage Growth in Japan: An Emerging Trend

Asset Management One’s economists have projected that regular wages in Japan will maintain their upward trajectory despite recent economic volatility, including fluctuations in the yen and Japanese equities. In July 2024, average monthly cash earnings in Japan increased by 3.6% year-on-year. This growth rate surpasses the 2.7% rise in the Japanese core consumer price index (CPI), which excludes fresh food.

The increase in real wages—adjusted for inflation—was 0.4% year-on-year in July, marking the second consecutive month of growth following a 1.1% rise in June. This uptick is expected to continue, driven by ongoing wage negotiations and broader economic trends.

Economic Implications of Rising Wages

Yuko Iizuka, an economist at Asset Management One, highlighted that the past three decades have been characterized by both minimal price inflation and stagnant wage growth. The anticipated real wage increase signifies a significant shift in Japan’s economic landscape. “This stagnation has held the economy back for almost 30 years. That ‘norm’ is now changing,” Iizuka remarked.

Increased real wages generally imply that consumers have more disposable income, which can stimulate economic activity. With more disposable income, consumers are likely to reinvest in the economy, potentially helping Japan overcome prolonged periods of economic stagnation.

Factors Driving Wage Growth

Several factors are contributing to the rise in Japanese wages. Among them are:

Labor Shortages: Japan is experiencing labor shortages, which are putting upward pressure on wages as companies compete for a limited workforce.
Yen Weakness: Analysts believe that the yen’s weakness against the U.S. dollar may have peaked, which could stabilize economic conditions and further support wage growth.
Significant Wage Hikes: In March 2024, Japan’s largest union group announced that large companies would increase wages by 5.28% as part of the spring “shunto” wage negotiations. This represents the largest pay increase in 33 years and is expected to contribute significantly to real wage growth.

Outlook and Economic Uncertainty

The Daiwa Institute of Research has noted that the effects of the substantial wage hikes from the 2024 spring negotiations are becoming evident. Economists at Daiwa anticipate continued real wage growth due to ongoing high-level wage increases, supported by the cycle of wage adjustments and price pass-through. They forecast that underlying inflation will stabilize around 2% as these wage dynamics unfold.

Despite these positive developments, there are concerns about Japan’s long-term economic prospects. Yuko Iizuka cautioned that longer-term anxieties, particularly among younger demographics, might temper consumer spending. Many younger individuals may opt for increased savings over spending, which could limit the overall boost in consumer expenditure.

Conclusion: A Turning Point for Japan’s Economy

The anticipated rise in Japanese real wages marks a significant turning point for the country’s economy. For the first time in over three decades, Japanese workers are expected to see their wages grow faster than inflation, potentially revitalizing consumer spending and helping to address long-standing economic stagnation.

As Japan navigates this new economic landscape, the implications of rising wages will be closely watched by policymakers, businesses, and consumers alike. The evolving wage dynamics could offer a glimpse into Japan’s future economic health and its ability to sustain growth amid shifting global economic conditions.