Japan's March wage data underperformed expectations, supporting the Bank of Japan's cautious stance on rate hikes amid ongoing domestic and international economic risks. According to data released by Japan's Ministry of Health, Labour and Welfare on Friday, nominal cash earnings rose 2.1% year-on-year in March, slower than the revised 2.7% in February and below economists' forecast of 2.5%. Meanwhile, real wages fell 2.1% year-on-year in March, widening from a 1.2% drop in February, indicating a continued decline in consumer purchasing power.
Although these data alone are unlikely to alter the Bank of Japan's interest rate plans, combined with other factors such as tariffs, they may prompt the central bank to maintain a more cautious stance in the short term. The Governor of the Bank of Japan stated on Thursday that if economic developments align with expectations, the bank will continue to raise rates, but he highlighted that uncertainty is "extremely high" and reiterated a cautious policy stance.
As widely expected, the Bank of Japan kept the interest rate unchanged at 0.5% for the second consecutive time last week and delayed the achievement of its 2% inflation target. However, Kazuo Ueda emphasized that the timing of adjustments does not imply a postponement of rate hikes.
It is important to note that the slowdown in Japan's nominal wage growth in March was partly due to temporary factors. Total working hours in March fell by 2.9% year-on-year. Moreover, although bonus payments increased by about 14% year-on-year, the growth rate dropped significantly compared to a 74% increase in February.
Nevertheless, the new wage data broadly aligns with the Bank of Japan's predictions, expecting nominal income to remain stable at a high level, supported by solid outcomes from Japan's corporate wage negotiations this year. A recent report from Japan's largest labor union indicates that employees have secured the largest wage increases in over 30 years, expected to be gradually reflected in employment figures by this summer.
Despite ongoing declines in real wages putting pressure on consumer spending, household expenditure data for March showed robust performance. Excluding inflation, household spending in March rose 2.1% year-on-year, far exceeding market forecasts of 0.2%. The Bank of Japan believes that further consumer spending expansion in the coming months will signal positive economic prospects. However, the central bank also warned in its outlook report that the pace of wage growth may slow due to the drag from weakening corporate profits.
