The Bank of Japan (BoJ) faces mounting pressure to act on rising wages, with expectations of a rate hike in January growing stronger following the latest wage data. November’s figures revealed a robust 3.0% y/y increase in labour cash earnings, surpassing analysts’ expectations and signalling continued economic recovery. However, inflation-adjusted real earnings dipped by 0.3%, underscoring that despite the wage growth, Japanese workers are still struggling to keep pace with soaring living costs, as reported by THINK ING.

While the nominal wage growth is encouraging, it hasn’t been enough to offset the effects of inflation, which has accelerated in recent months. The end of the government’s energy subsidy programme in November further contributed to the uptick in inflation, which reached a notable 3.0% in January. Despite this, the BoJ’s preferred gauge of earnings – same-sample cash earnings – rose even more strongly at 3.5%, heightening the likelihood of a policy shift.

In December, Governor Kazuo Ueda had cast doubt on a rate hike in January, citing uncertainties surrounding US policies and the need for clearer evidence of sustainable wage growth. Initially, markets leaned toward a March rate hike, especially with the Shunto wage negotiations due in March. However, recent data points to a tightening labour market, with ongoing wage growth and strong consumption suggesting that the BoJ may be compelled to act sooner.

The looming possibility of a rate hike is also supported by expectations that the Federal Reserve will slow the pace of its own rate cuts, which could push the Japanese yen lower, adding further inflationary pressures to the domestic economy. Tokyo’s inflationary trends, showing a 3.0% rise in January, underscore the need for the BoJ to take more aggressive steps to maintain price stability.

Although Ueda has expressed caution, recent developments paint a picture of an economy that could withstand a rate hike, making January a very plausible time for the BoJ to adjust its monetary policy. The BoJ’s decision will hinge not only on domestic economic conditions but also on global uncertainties, particularly the policies of the incoming US administration under President Trump.

As Japan’s economy grapples with inflation and wage growth, all eyes will be on the BoJ's next move, with markets closely monitoring these evolving dynamics.