Strong Japanese Wage Growth Increases the chances of October Interest Rate Increase

Solid wage growth is likely to support recovery in sustainable expenditure and inflation

Japanese labor cash income rose 4.1% year to year in July, accelerated from 3.1% in June, defeating market consensus by 3.0%. Bonus payments (7.9%) rose significantly, while basic payments (2.6%) also rose strongly. Cash income of the same sample, the size of the choice of Bank of Japan, up 2.4% in August from 2.3% in July, losing a consensus 2.5%. Meanwhile, an unexpected real labor cash revenue recovered 0.5% in July (vs -0.8% in June), up for the first time since December 2024. Separate reports show that household expenditure rose 1.4% yoy in July, which was lower than market consensus but marked the third monthly growth month respectively.

Local cables report that the minimum wage in Japan is expected to rise to 1,121 yen ($ 7.6) from 1,055 yen at this time ($ 7.1), the highest leap in history. Thus, this is likely to maintain company wage growth and support sustainable inflation trends.

We continue to believe BOJ to give an increase of 25 BP in October

President Trump signed the executive order of the US-Japan trade agreement on Thursday, bringing more certainty of trade to the 15% tariff agreement between the two countries. Meanwhile, the first round GDP which is stronger than what is thought to show that the economy is tough. Today’s data strengthens our expectations of BOJ to raise tariffs in October.

However, BOJ can postpone the decision to increase interest rates if there are more concerns about the potential economic impact of increasing US tariffs. Another main risk of our view is the current state of Japanese domestic politics. Prime Minister Ishiba Shigeru may face potential leadership challenges if the Liberal Democratic Party starts the initial leadership voting, which can introduce political uncertainty and lead to a sudden movement in the financial markets.
Source: Ing