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Wage growth in Japan remained sluggish in February, casting doubt over the economy’s ability to hit the central bank’s 2 per cent inflation target.
Labour cash earnings growth inched higher to 0.4 per cent year-on-year from a revised 0.3 per cent (previously 0.5 per cent) in January. This was weaker than the 0.5 per cent growth economists had pencilled in.
Perhaps more disappointing was that real cash earnings, which take inflation into account and are typically helpful in gauging household spending behaviour, came in at zero during February. That was from a revised year-on-year decline of 0.1 per cent (previously zero).
Wages for part-time workers grew at their fastest pace in years, offsetting a decline for those in full-time jobs.
Overall, this may temper expectations following last week’s jobs data that showed the jobless rate fell to 2.8 per cent in February, the lowest level since June 1994.
Marcel Thieliant at Capital Economics said wage growth is too weak to hit the Bank of Japan’s 2 per cent inflation target. He also points out a 5.5 per cent rise in bonus payments had only a limited impact on headline pay, while a rebound in overtime pay has a way to go yet as overtime hours rose the most since autumn 2014 with a 1.5 per cent annual advance.
The key point though is that this is still far too slow to lift inflation towards the Bank of Japan’s 2% target. With productivity growth set to return to its long-run trend of around 1% soon, overall labour cash earnings would have to rise by 3% per annum to reach 2% inflation. Sluggish wage gains are one reason why we think the Bank is unlikely to tighten policy anytime soon.
Analysts at Barcalys noted:
In the “shunto” spring wage negotiations, which are important to the outlook for wages, FY17 wage hikes came to 2.06% for large companies (300 or more union members) and 1.99% for smaller companies based on the third estimates of the Japan Trade Union Confederation (31 March).
In the initial estimates (17 March), wage hikes came to 2.06% for smaller companies, matching the average for all companies combined. Estimates for smaller companies tend to be revised down earlier than those for large companies. Whether this pattern holds in future estimates will be the next focus.