Japan wages push bolsters case for rate hike
Early signs of Japan’s annual wage negotiations for next year point to a new round of wage increases despite profit pressure from US tariffs, strengthening the case for the Bank of Japan to raise interest rates further.
The wage outlook drew renewed attention after BOJ Governor Kazuo Ueda said he wanted “some more data” on the initial momentum of next year’s wage talks – particularly whether companies affected by US tariffs will continue to raise wages.
Labor unions have already made it clear that they will again demand bumper wage increases.
Sustainable wage growth will support private consumption and give the BOJ confidence to raise interest rates without disrupting Japan’s economic recovery.
Despite significant increases in recent years, real wage growth has remained negative as core consumer inflation remains above the BOJ’s two percent target.
Rengo, Japan’s largest labor union umbrella group with seven million members, wants wage increases of five percent or more in 2026. That’s what Rengo wanted in 2025, and it resulted in the biggest pay increase in 34 years.
The leading union of automotive manufacturers, which are among the sectors most affected by US tariffs, has no plans to reduce wage demands in labor negotiations for next year despite the snow squeeze, the union president told Reuters this month.
Japan’s annual wage negotiations usually begin with unions drafting demands late in the closing year, followed by formal talks early the next year and agreements announced in March.
Companies may, of course, ignore union demands for 2026 wages, as the impact of higher US taxes on shipments of Japanese goods will intensify in the coming months, clouding the outlook for the export-dependent economy.
But manufacturers continue to resist so far; A Reuters poll this month shows confidence rose to a nearly four-year high in November, boosted by yen softness and strong orders.
A tight labor market is also likely to put pressure on companies to stick to generous wage increases.
A separate Reuters poll this month showed 72 percent of respondents plan to increase wages next year by about the same rate as in 2025.
A survey conducted in November by the Japan Economic Research Center showed that economists predict wage increases will average 4.88 percent next year.
This is higher than the 4.74 percent predicted in January during this year’s wage talks, which led to a 5.52 percent increase.
“Companies have ample room to increase wages,” said Yoshiki Shinke, senior executive economist at the Dai-ichi Life Research Institute, and profits have remained high.
He predicts next year’s wage negotiations will average an increase of 5.2 percent, slower than this year’s but exceeding five percent for the third year in a row.
Companies may also face pressure on wage increases from the new administration of Prime Minister Sanae Takaichi, who has vowed to build a strong economy where wage increases exceed inflation.
Local media reported that Japan’s largest business lobby, Keidanren, will emphasize the need to maintain “strong wage momentum” in guidelines to be presented to member companies in January for next year’s wage negotiations.
BOJ Governor Ueda told parliament on Friday that the central bank was still in the process of collecting data and information on the wage outlook, including from its branches across the country.
“BOJ will closely examine various data and information in the upcoming meetings and discuss the feasibility and timing of the interest rate increase,” he said.
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