Japan's salary increase supports the implementation of the Bank of Japan's interest rate hike in September

The latest salary data released by the Japanese authorities has reversed the previous picture of weak salary growth. The overall performance has far exceeded market expectations. Data shows that Japan's real salary increased 2.4% year on year in July. The real salary growth rate in June was revised to 2.2%, and it further increased in July, indicating that the recovery pace of residents' real income in Japan is accelerating.

For a long time, stagnant salaries and weak income have been the core problem hindering Japanese consumption and economic recovery. Now, this situation is improving. This significant salary increase was not driven by a single factor. Japanese labor department officials explained that in addition to the assistance of temporary special subsidies, the core reason was the improvement in the salary fundamentals. At the same time, the inflation trend in Japan was relatively mild, and there was no situation where soaring prices swallowed up income. This, together with other factors, pushed up the actual salary level of residents.

In Japan, salary increases have been achieved across the board. In July, the nominal average salary in Japan increased by 4.7% year-on-year, with the monthly salary reaching approximately 436,400 yen ($2,800). In July, the regular basic salary of Japanese workers increased by 4.1% year-on-year, setting a new record for the fastest growth rate since April 1992, which clearly indicates a substantial increase in the employment costs of Japanese enterprises and is an intuitive signal of the tightening of the labor market.

The proactive increase in base salaries by enterprises means an enhanced willingness for long-term employment, rather than a short-term temporary adjustment. Other salary components also maintained positive growth. In July, overtime pay increased by 3.1% year-on-year, slightly declining from the 3.4% growth rate in June. The production rhythm of enterprises has become more stable, and they no longer rely on overtime work to boost production capacity. The special compensations such as one-time bonuses issued by enterprises increased by 6.3% year-on-year, becoming an important supplement to residents' income growth.

Whether real wages can grow steadily is a key factor constrained by the inflation level. If the price increase is too rapid, even the highest nominal wage growth will be offset. This time, Japan's wage growth was inseparable from a moderate and controllable inflation environment. Data shows that the inflation indicator corresponding to wages calculated by the Bank of Japan rose to 2.2% in July, slightly higher than 1.9% in June, and exceeded the 2% threshold for the first time this year. However, compared with the high inflation of 3.6% last year, the current price pressure has eased.

The significant increase in wages and moderate inflation have not only avoided high inflation squeezing residents' consumption but also boosted residents' purchasing power through wage increases, gradually forming a positive cycle of rising wages, recovering consumption, and economic recovery, completely getting rid of the past situation of deflation and sluggish wages.

Wage data is the core reference indicator for the Bank of Japan in formulating monetary policies and is also the key basis for this round of monetary tightening. The continuously strengthening wage data has completely raised market expectations for the Bank of Japan to raise interest rates in September. With three months having passed since the last interest rate hike, this time it is highly likely to restart the tightening of monetary policies. Previously, the Bank of Japan's governor has publicly released clear signals, stating that the September interest rate meeting will focus on discussing the issue of raising interest rates. The core judgment criterion is whether the inflation risk is on the rise.

This unexpectedly strong wage data precisely confirms that inflation has a foundation for sustained recovery, providing sufficient data support for the interest rate hike. Japan's biggest policy dilemma for many years has been the inability to break free from the shackles of deflation. Now that wages are rising and inflation is recovering, the central bank has sufficient reasons to exit special policies such as negative interest rates and loose monetary policy.

The combination of wage recovery and the rising expectation of interest rate hikes has led to adjustments in the yen, the stock market and the bond market. First, the yen exchange rate. The strengthening expectation of an interest rate hike in September is expected to narrow the interest rate spread, pushing the yen to initiate a phased rebound. The Japanese bond market will also experience volatility. The tightening of monetary policy will push up bond yields. In the stock market, the consumption sector will benefit from the increase in residents' wages. However, for enterprises with high debt levels, an increase in interest rates will raise their financing costs, and their valuations will face a correction.