Japan’s real wages drop the most in 8 years as inflation hits

Japan’s inflation-adjusted real wages saw the biggest drop in eight years in fiscal 2022, government data showed Tuesday (23), highlighting the pain of inflation eroding consumers’ purchasing power.

The annual data showed the importance of accelerating wage increases to overcome stubbornly high inflation.

This is not the kind of stable and sustainable inflation the central bank wants to see in reaching its 2% target.

However, analysts expect real wages to rebound this fiscal year as inflation slows while the labor market remains tight and the economy is in moderate recovery, paving the way for the Bank of Japan (BoJ) to reduce its monetary easing.

Still, BoJ Governor Kazuo Ueda has repeatedly maintained that the central bank would continue monetary easing to support a fragile economy while forecasting inflation to slow to below 2% later this year.

“The risks to inflation and wages are quite tilted to the upside,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

“A combination of lower inflation, tight labor market, and solid corporate profits will set the stage for monetary policy normalization as early as this year.”

The labor ministry data also emphasized the need for Prime Minister Fumio Kishida’s government to fuel a virtuous inflation and wage growth cycle.

Nominal wages rose 1.9% in the last fiscal year that ended March, the fastest increase in 31 years, but inflation of 3.8% outpaced wage gains, resulting in real wages falling 1.8% in fiscal 2022, the data showed.

It was the biggest annual drop since fiscal 2014, when sales tax increases caused broader price increases and reduced real wages by 2.9%.

The data suggest that wages must rise further to beat inflation and help boost consumer purchasing power and private consumption, which accounts for more than half of the economy.

Major companies agreed to raise wages by nearly 4% this year, the fastest in three decades, in a sign that cautious Japanese companies see the need to improve wages to secure skilled workers in the face of labor shortages in the rapidly aging population.

Wages in Japan have barely grown in the past three “lost decades” since the bursting of an asset-inflated economic bubble.

By comparison, some other Group of Seven (G7) economies have seen wages rise much stronger, about 1.4 times over the same period.

With information from Valor

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