By Leika Kihara
TOKYO (Reuters) – The Bank of Japan said wage increases are broad-based across the economy as a result of a tight labor market, signaling confidence the country is making progress toward sustainably achieving its 2 percent inflation target.
The optimistic assessment made Monday at the BOJ’s quarterly meeting of regional branch managers could lead to the central bank raising rates as early as its next meeting on July 30-31.
Separate data showed that the average basic wage of Japanese workers rose 2.5% in May, the fastest pace in 31 years, suggesting that rising wage growth is giving households more purchasing power and boosting consumption.
“Many regions reported that the large wage increases implemented by large companies during this year’s wage negotiations also passed on to small and medium-sized companies,” the BOJ said in a summary of discussions at the branch managers’ meeting.
The assessment was compared with that of the previous meeting in April, when the BOJ said there were “hopeful signs” that robust wage increases at large firms would spread to smaller companies.
The BOJ report said some smaller regional companies decided to prioritize raising wages to retain or hire workers even though they were not making enough profit, a sign that Japan’s shrinking workforce is exacerbating chronic labor shortages.
In many regions, we also saw companies either pass on rising costs or consider doing so, particularly those in the service sector, the BOJ said in the overview.
“We are seeing wage increases not only at large companies but also at smaller ones,” said Kazushige Kamiyama, the BOJ’s Osaka branch manager who oversees the Kansai region, western Japan.
“For companies, higher wages mean higher costs. Some of them are starting to pass on the costs by increasing service prices,” he told a news conference.
The central bank’s view on wage developments is one of the key factors the Governing Body will closely examine at this month’s policy meeting as it sets interest rates and new quarterly forecasts for growth and inflation.
BOJ Governor Kazuo Ueda has said wage increases should also be rolled out to smaller firms and companies should charge more for their services before the central bank considers raising interest rates from their current near-zero level.
Many market players expect the BOJ to raise rates sometime this year, although they are divided over the timing.
In a sign of the BOJ’s optimism about consumption, regional branch managers said household spending was “broadly robust”.
A government survey released on Monday showed that sentiment among companies in the service sector, seen as a key indicator of consumption, improved for the first time in four months in June.
But the recovery was mainly driven by an increase in inbound tourism, which offset the frugal spending of households, which were hit hard by the rising cost of living.
“A few outlets reported that rising inflation caused consumers to seek out cheaper products, especially in supermarkets,” the BOJ’s summary said.
Household spending fell unexpectedly in May as higher prices continued to weigh on consumers’ purchasing power. While analysts expect real wages to turn positive in the coming months, the recent fall in the yen could put upward pressure on import costs.
Core consumer prices rose 2.5% in May from a year earlier, more than two years above the BOJ’s target.
(Reporting by Leika Kihara; Editing by Sam Holmes and Jacqueline Wong)
