Early signs of Japanese wages in 2026 support the possibility of a BOJ rate hike in the short term
Early signs of Japan’s annual wage negotiations for next year point to solid wage increases despite profit pressure from US tariffs, strengthening the chances for the Bank of Japan to raise interest rates further.
The wage outlook has attracted renewed attention after BOJ Governor Kazuo Ueda said he wanted “more data” on the initial momentum of wage talks next year – especially whether companies hit by US tariffs will continue to raise wages.
Unions have made it clear they will again demand big pay rises. Sustained wage growth will support private consumption, giving the BOJ confidence to raise interest rates without disrupting Japan’s economic recovery. Despite large increases in recent years, real wage growth remains negative as core consumer inflation remains above the BOJ’s target of 2%.
Rengo, the umbrella group of Japan’s largest unions, with 7 million members, is seeking wage increases of 5% or more by 2026. That’s what Rengo is calling for in 2025, resulting in the biggest pay increase in 34 years.
The leading union for automakers, one of the industries hardest hit by U.S. tariffs, also has no plans to reduce its wage demands at next year’s labor talks despite pressure on profits, the union’s head told Reuters this month.
Annual wage negotiations in Japan typically begin with unions laying out demands at the end of the closing year, followed by formal talks early the following year, and the settlement announced in March.
Companies, of course, may not heed union demands on wages in 2026 as the impact of higher US tariffs on shipments of Japanese goods is likely to increase in the coming months, clouding the outlook for the export-reliant economy.
But so far manufacturers are holding out, with a Reuters poll this month showing sentiment hitting a four-year high in November, supported by a weaker yen and solid orders.
A tight labor market will also likely put pressure on companies to stick with big pay increases. A separate Reuters survey this month showed 72% of respondents intended to raise salaries next year by almost the same rate as in 2025.
The strain of labor shortages is particularly acute in the restaurant industry. Operator of the Watami gastropub chain
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said it would offer multi-year raises averaging 7% per year starting in 2026 to about 1,200 full-time employees in Japan.
“For now, overall momentum looks strong, with earnings in July–September generally solid,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, adding that the biggest question is whether average wage increases will cross the 5% line.
A survey conducted by the Japan Economic Research Center in November showed that economists projected average wage increases of 4.88% next year. The figure was higher than January’s forecast for this year’s wage talks of 4.74%, which resulted in a rise of 5.52%.
“Companies have a lot of room to raise wages,” and profits are still rising, said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute. He predicted an average increase of 5.2% in wage talks next year, slower than this year but exceeding 5% for three years in a row.
UEDA SPEAKS TO BUSINESS EXECUTIVES IN NAGOYA
Companies may also face rising wage pressure from the new government of Prime Minister Sanae Takaichi, which has pledged to build a strong economy where wage increases outpace inflation.
Domestic media have reported that Japan’s largest business lobby, Keidanren, will emphasize the need to maintain “strong wage momentum” in guidelines it will hand over in January to member companies for next year’s wage talks.
BOJ Governor Ueda told parliament on Friday that the central bank was still collecting data and information on the wage outlook, including from its branches nationwide.
“The BOJ will discuss the feasibility and timing of increasing interest rates at the next meeting by looking at various data and information,” he said.
While the outcome of wage negotiations at major companies will not be clear until March, some executives may provide hints about their 2026 pay plans next month, analysts said.
More information on the timing of the BOJ’s next rate hike could be available on December 1, when Ueda speaks with business executives in the central Japanese city of Nagoya, which is home to auto giant Toyota Motor Corp.
A majority of economists polled by Reuters expect the BOJ to raise interest rates in December, reinforced by the yen’s slump to a 10-month low against the dollar.
Source: Reuters
