Solid August wage data point to sustained momentum in pay growth
– Initial indications on 2025 Shunto negotiations likely to come in firm
– Sentiment surveys holding up through 3Q
– Next week: September underlying inflation remains firm
Our forecast for a series of policy rate rises reflects a call that the BoJ will look through volatility in the cyclical activity data to focus on what it terms a âvirtuous cycleâ between rising wages and higher prices. As firming wage growth bolsters incomes, domestic demand should remain supported, bolstering inflation.
In this context, this weekâs August employer survey provided the latest confirmation that wage growth is becoming increasingly entrenched. While average headline wages are settling at a firm 3% rate, equally important is the broadening share of employers reporting wage growth at this elevated level. For the past several quarters, around half of all sectors are seeing wages rise by at least 3%, a higher share than the recent average.
While the monthly wage data can be volatile, this weekâs firm headline figure almost entirely reflected a similar-sized strong gain in scheduled earningsârather than temporary special bonus payments. This marks the first time regular monthly wage growth has topped 3.0%oya since the early 1990s, an encouraging sign that base pay is trending higher. Alongside guidance from corporates, we think the next marker in terms of tracking wage momentum will be the Japan Trade Union Confederationâs (Rengo) initial stance on next yearâs Shunto negotiations, to be announced later this month. Last year, Rengo announced a 5% initial ask, leading to a 3.6% rise in base pay in the final round of negotiations. We think it increasingly likely that next yearâs negotiations come in at least as strong.
With the high-frequency data thus suggesting that reflationary dynamics continue to broaden, we think the BoJ remains committed to a gradual path of policy normalization. Against this backdrop, we look for a firm 0.4%m/m sa rise in the global standard measure of core prices in next weekâs September nationwide inflation report, even as the temporary reintroduction of utility subsidies trims the headline rate.
Solid wage growth to keep BoJ on track
August wage data looked solid, driven by firm rises in pay for full-timers (2.9%; another cycle high) and part-timers (4.8%), both marking an acceleration over their July rates.
The usual disclaimers over the volatility of the monthly wage data apply. But constant sample data are sending a similar strong message as the choppy headline numbers: total wages rose 3.1%oya and base pay came in at 2.9%oya, almost unchanged from July. Thus, a string of solid monthly wage gains is lending weight to our long-standing view that pay growth is breaking into a higher medium-term range. We continue to expect earnings growth to trend around 3%oya.
While real wages dipped 0.6%oya in August, we continue to think that sustained nominal wage growth will pull real wages up over the medium term; our forecast looks for real wage growth to turn positive through year-end. This should provide some additional support to domestic demand.
Sentiment holding up through noise
In the September Economy Watchers Survey, sentiment among small and medium enterprises (SMEs) fell 1.2pt to 47.8 against our forecast of a modest 0.2pt rise, after three consecutive monthly increases (Figure 4). The decline is primarily concentrated in the household-related retail and services sectors, which saw decreases of 1.8 points and 3.5 points, respectively, partially offsetting recent gains. However, the outlook is not entirely pessimistic, with household-related index declining only 0.9 points following a solid 2.3-point increase in the previous month. Though SMEs are concerned about sticky inflation, we expect that solid wage growth will sustain strong consumption momentum.
The good news is from business-related SMEs, whose sentiment rose 0.9pt to 49.3. Some respondents attributed this improvement to yen appreciation, which has contributed to lower input costs, and gradual cost pass-through, enhancing profitability. The manufacturing sector, which has been dampened due to special factors since the beginning of the year, experienced a notable sentiment increase of 2.5 points, reaching a seven-month high of 48.6.
The October Reuters Tankan survey of large manufacturersâ sentiment also sent a moderately encouraging signal. Manufacturersâ sentiment rose 3 points to 7, close to our forecast of a modest 2-point increase, reflecting mixed sentiment trends across sectors. This increase only partially reverses the decline in the previous month, possibly indicating ongoing concerns about weak demand from China and volatile yen movements. On the flip side, non-manufacturersâ sentiment fell for the fourth consecutive month to 20, although it remains at a relatively elevated level. We expect that sentiment across both sectors will improve as uncertainties diminish, reflected in relatively upbeat outlooks (manufacturers: 9, non-manufacturers: 22).
Looking at the details, sentiment remained somewhat mixed across sectors. The textile sector rose 9 points to 0 after a sharp 29 point drop, and the chemicals sector rose 12 points to 19, reaching a two-year high. The food processing sector rose 17 points, fully reversing the last monthâs drop, which we attributed to temporary weather factors. The electronics sector rose 4 points to -10, signaling a modest pickup. On the flip side, sentiment among auto producers remained stable at 0 for the third consecutive month, suggesting a slow recovery in this sector.
The weakness among non-manufacturers is primarily concentrated in the wholesale sector and the transportation sector. Sentiment among wholesalers fell to -5, marking the first negative sentiment since May 2021. On the flip side, sentiment in the retail sector rose 7 points to 47. This may indicate that the softness is not due to weak domestic demand but rather higher input costs that are not being passed on to wholesale output prices.
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