Japan just posted its strongest nominal wage growth since the late 1990s, and the economy is expanding faster than previously thought. For a country that spent decades fighting deflation with every tool in the central bank’s arsenal, that combination reads less like a data release and more like a permission slip.
Swap markets now price in roughly a 98% probability that the Bank of Japan will raise its policy rate by 25 basis points to 1.25% at its September 17-18 meeting. If that happens, it would mark the highest policy rate Japan has seen since the mid-1990s, continuing a tightening cycle that already lifted rates to 1% in June.
The numbers behind the confidence
Two data points landed on September 8 and together painted a picture that rate hawks could frame and hang on their walls.
First, the Cabinet Office revised second-quarter GDP growth upward to an annualized rate of 1.4%, from an initial estimate of 1.1%. On a quarter-on-quarter basis, that’s 0.4% instead of the previously reported 0.3%. The revision was driven partly by a smaller-than-expected decline in capital spending, which came in at negative 0.9% rather than the earlier reading of negative 1.2%.
Net exports pitched in too, contributing 0.5 percentage points to overall growth.
Second, the Ministry of Health, Labour and Welfare reported that real wages rose 2.4% year-on-year in July. That was the largest increase since May 2021 and marked the seventh consecutive month of gains. Nominal cash earnings climbed 4.7% year-on-year, the fastest pace since January 1997.
Why wages matter more than GDP here
This year’s shunto spring wage negotiations delivered average pay increases exceeding 5% at major firms for the third consecutive year.
Private consumption, however, remained flat in the second quarter. That’s the soft spot in the story. Wages are rising, but consumers aren’t spending more yet. Part of the explanation lies in the fact that real income gains have only recently turned positive after a long stretch where inflation outpaced pay.
A broader shift after decades of easy money
After raising rates to 1% in June, which was already a level not seen since 1995, the BoJ is now poised to push further.
Several forces are reinforcing the inflation backdrop. A weaker yen has made imports more expensive, particularly energy commodities. Geopolitical tensions in the Middle East have added upward pressure on oil and gas costs.
For global markets, a more hawkish BoJ carries significant implications. Japan has been the world’s largest creditor nation, and its institutional investors hold enormous portfolios of foreign bonds. When domestic yields rise, the incentive to repatriate capital strengthens. The last time the BoJ surprised markets with a policy shift, in late 2022 when it widened its yield curve control band, the ripple effects were felt across US Treasury markets and global currency pairs within hours.
The interest rate differential between Japan and the US would continue to narrow, a dynamic that has already contributed to periodic unwinding of yen carry trades this year.