1、 Latest data on wage growth in Japan

The basic salary increased by 3.1% year-on-year, the fastest growth rate in 32 years. After excluding bonuses and overtime pay, the salary of full-time employees increased by 3%, breaking through this level for the first time since July 2023.

The nominal cash income increased by 2.8% year-on-year, lower than the market expectation of 3%. Actual cash income decreased by 1.8%, the largest decline since March 2024, reflecting the erosion of high inflation on workers' living costs.

Overall, despite the acceleration of wage growth, inflationary pressures still weaken workers' actual purchasing power.

2、 The impact of wage growth on the policies of the Bank of Japan

Wage growth is a core indicator for the Bank of Japan to evaluate demand driven economic growth. For a long time, Japan has relied on loose monetary policy to stimulate the economy, so sustained wage growth is seen as a signal of stable economic recovery.

The data from the Bank of Japan today confirms a positive trend in wage growth, so there is no need to adjust policy stance. In other words, these data will not prompt the central bank to accelerate or postpone the next interest rate hike. "- Naoki Hattori, Senior Economist at Mizuho Research Institute

At present, the market generally predicts that BOJ may further raise interest rates in the summer, but some analysts believe that action may be taken on May 1st.

Despite strong salary data, the short-term trend of the Japanese yen still faces three major factors:

1. The market still doubts the path of the Bank of Japan's interest rate hike

Although wage growth provides a reason for BOJ to raise interest rates, the uncertainty of consumer recovery remains high due to the decline in actual income. If BOJ adopts a more cautious policy stance, the market may re bet on the widening of the US Japan interest rate differential, leading to continued weakness of the yen.

2. The Federal Reserve's policy stance still dominates the foreign exchange market

The current market still expects the Federal Reserve to cut interest rates in the second half of 2025, but strong US economic data may delay the rate cut process. If the Federal Reserve delays interest rate cuts, the US dollar may continue to strengthen, putting pressure on the Japanese yen.

3. Short term support for Japanese yen due to hedging demand

The recent increase in global geopolitical risks may drive investors to buy Japanese yen for short-term hedging. But if BOJ fails to deliver on further interest rate hikes, safe haven buying may not be able to sustain support for the yen.

3、 Future prospects

Although the Japanese yen may still be suppressed in the short term, if the BOJ does raise interest rates in May or summer, the yen may experience a rebound. The key factors that the market is concerned about include:

1. Whether wage growth continues: If wages continue to increase and drive real income to recover, the possibility of BOJ interest rate hikes will further increase.

2. Timing of Fed interest rate cuts: If the Fed starts cutting interest rates in the second half of 2025 and the BOJ continues to raise interest rates, the yen will receive stronger support.

3. Global economic trend: If risk aversion intensifies, investors may increase their holdings of the Japanese yen, driving its appreciation.

4、 Edit viewpoint

Japanese wage growth reaches a 32 year high, providing BOJ with a foundation for further interest rate hikes. However, due to the continued decline in real income and the uncertainty of consumer recovery, the market remains cautious about the path of interest rate hikes for BOJ.

In the short term, the Japanese yen may continue to be under pressure, especially if the Federal Reserve delays its interest rate cuts. But if the BOJ raises interest rates in May or summer, the yen may experience a temporary rebound, with the US Japan interest rate differential narrowing and market expectations driving the yen to strengthen against the US dollar.