Japan's nominal wage growth hit a new high since 1997 in July, providing further support for the central bank's interest rate hike.

Japan's July wage data showed a broad-based rebound, with nominal wage growth hitting a near 30-year high and real wage increases reaching their largest in five years. This data further fueled market expectations of a Bank of Japan interest rate hike this month.

According to data released by Japan's Ministry of Health, Labour and Welfare on Tuesday, nominal wages (total cash income) rose 4.7% year-on-year in July, higher than the revised 4% in June and far exceeding economists' forecasts of 3.8%. Bloomberg reports that this is the largest monthly increase since January 1997, and the sixth consecutive month that nominal wage growth has exceeded 3%—a streak that has only occurred once in 34 years.

In terms of real wages, real wages in July increased by 2.4% year-on-year, higher than the revised 2.2% in June, marking the largest increase since May 2021 and the seventh consecutive month of positive growth.

Bank of Japan Governor Kazuo Ueda said last week that the central bank will discuss interest rate hikes at subsequent meetings, including in September, with a focus on whether inflation risks are rising, sending a strong signal that a rate hike is likely this month.

Wages are rising across the board, with basic salaries leading the way.

The highlights of the July wage data are not only the total amount, but also the strong structure.

Basic wages (regular compensation) rose 4.1% year-on-year, the fastest growth since April 1992, according to Reuters, a significant acceleration from the revised 3.5% in June.

Special payments (mainly one-off bonuses) jumped 6.3% year-on-year, up from a revised 4.7% in June. Overtime pay grew by 3.1%, a slight slowdown from 3.4% in June.

"The boost from special payments, coupled with steady growth in nominal wages and relatively mild inflation, has collectively driven the rise in real wages," said a Ministry of Labor official.

More stable indicators, which exclude bonuses, overtime pay, and sampling errors, show that full-time employee compensation increased by 2.7%, further confirming the widespread nature of wage increases.

The results of the spring campaign are evident, with the minimum wage being raised accordingly.

This round of wage acceleration has its structural support.

According to Bloomberg, employees of Rengo, Japan’s largest labor union, have secured a pay rise of more than 5% for the third consecutive year in the annual spring wage negotiations.

At the same time, the national minimum wage was raised to an average of 1,177 yen (about US$7.55) per hour this fiscal year, the second-largest increase on record. Bloomberg points out that this means the upward trend in wages is spreading to a wider range of industries and jobs.

Continued improvement in corporate profitability has provided financial support for wage increases. In the quarter ending June this year, Japanese corporate recurring profits grew for the seventh consecutive quarter, with the manufacturing sector performing particularly well, benefiting from strong growth in demand related to artificial intelligence and data centers.

The ongoing labor shortage is also driving employers to raise wages. According to a survey released last month by Empire Databank, most companies reported a shortage of full-time employees, with the financial, construction, and logistics sectors being particularly affected.

Interest rate hike expectations are rising, but weak consumption remains a concern.

Wage data exceeded expectations, and the market had already largely priced in a September rate hike by the Bank of Japan. Some investors even anticipated continued tightening at shorter intervals thereafter.

However, whether the central bank can maintain its tightening path depends to some extent on whether income growth can translate into stronger domestic demand in Japan. Currently, this transmission is not going smoothly.

Data released last week showed that household consumption spending declined for the eighth consecutive month in July, as consumers cut back on discretionary spending. Earlier, second-quarter GDP data also showed that private consumption grew by almost nothing during the quarter.

Inflationary pressures are also a significant concern. The Ministry of Labor's inflation indicator, used to calculate real wages, rose to 2.2% in July, marking the first time it has exceeded 2% this year. According to another report from Teikoku Databank, nearly 5,000 food and beverage products are scheduled to increase in price in September, three times the number a year ago, due to factors including the Middle East conflict pushing up crude oil and naphtha prices, and the weakening yen.

In its latest outlook, the Bank of Japan projects that nominal wages will continue to grow at the current pace as the labor market remains tight. However, whether wages can truly keep pace with the cost of living will remain a key variable determining the direction of consumption.

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