–Combined with Improving Business Confidence in Tankan, Wages Survey Points to BOJ Rate Hike This Week
By Max Sato
(MaceNews) – Three days before its policy-setting meeting, the Bank of Japan on Monday released the results of a quick survey that showed a majority of companies plan to maintain the existing relatively high pace of wage hikes into fiscal 2026 starting in April in order to address widespread labor shortages.
Combined with improving business confidence found in the December quarter Tankan survey issued by the bank on Monday, the BOJ appears to have gained sufficient evidence to justify an interest rate hike on Friday, which officials have said would be an adjustment of super-low rate to more normal levels and thus would not choke off economic activity.
At its Dec. 18-19 meeting, the BOJ’s nine-member board is widely expected to decide either unanimously or in a majority vote to raise the target for the overnight interest rate by 25 basis points (0.25%age point) to 0.75% after standing pat in the previous six meetings. Governor Kazuo Ueda has said uncertainty over the protectionist U.S. trade policy has eased and that he is looking for early signs that many firms plan to continue raising wages at a solid pace into fiscal 2026.
Of the wage intention reports compiled by the bank’s head office and 32 branches, 29 showed that firms in their regions planned to raise wages in fiscal 2026 “at about the same rates as in fiscal 2025, when high wage growth was realized.”
Only two branches reported that management at firms in their regions expected to offer a higher pay increase and two others found that businesses in their coverage areas could not afford to keep up with the current pace.
For fiscal 2025, wage hikes announced by major firms topped a key 5% mark (high by Japanese standards) for the second year in a row, estimated at 5.25% in weighted average and the highest rate in 34 years (base wages are up 3.70%), according to final count the Japanese Trade Union Confederation (RENGO) released on July 3. That is up from 5.10% tallied a year ago, which was a 33-year high (base wages growth was 3.56%).
But the pace of wage increase has lagged behind a spike in the costs for food, energy and other necessities as firms continue passing higher import and production costs onto consumers after years of hesitation for fear of losing market share. Real wages showed a brief two-month period of a slight year-on-year rise, each in the middle and at the end of 2024, propped up by summer and winter bonus payments, but they now posted a 10th consecutive decline in October, down 0.7% after slipping 1.3% the previous month.
“It seems that the number of firms expecting a clear improvement in their profits is not large, partly owing to the effect of U.S. tariff hikes,” the BOJ said in a statement. “However, most of firms seem to consider that it is necessary to raise wages as much in fiscal 2026 as in fiscal 2025 or to a similar extent as the prevailing wage formed by other firms, with a view to retaining staff and improving their motivation amid persistent, severe labor shortages.”
For larger companies, wage increases comparable to fiscal 2025 remain “feasible” in the upcoming fiscal year but many of smaller businesses indicate that maintaining the current pace will be “difficult,” due mainly to poor profitability stemming from delayed price pass-through, the BOJ said.
By industry, officials at automakers told the bank that it would be hard to maintain the pace of wage increase as they have been hit by reduced profits from the key U.S. market after the Trump administration imposed stiff import duties earlier this year aimed at protecting U.S. manufacturers.
Meantime, firms in the services sector stressed the need to keep up with the current pace to “secure and retain talent,” the BOJ survey found.
“By age group, many firms mentioned that they would prioritize wage increases of younger age groups, including a raise in the starting salaries for new graduates, because labor shortages in those age groups are particularly severe and the hiring situation is competitive,” the BOJ said.
Relatively high minimum wage growth set for fiscal 2025 has led to higher pay for part-time employees. Against this backdrop, some firms told the bank that they see the need to also raise wages for full-time employees “to be fair” mainly in rural areas where securing qualified workers tend to be more challenging than in big cities.
In the two reports indicating a higher pace of wage growth, an official at a food and beverages firm said, “We plan to raise wages in fiscal 2026 at a higher rate than in fiscal 2025, in line with the rate of increase in minimum wages, by
restraining profits.”
Among many firms that plan to maintain the wage hike pace, a hotel manager told the survey, “The difference between the base pay of full-time employees, when
converted into hourly wages, and the hourly wages of part-time employees has narrowed, given the minimum wage increases. To retain staff, we think that it is necessary to maintain a wage growth rate in fiscal 2026 as high as in fiscal 2025.”
In the two reports indicating a slower pace of pay hikes, a manager at a general machinery maker said, “Profits are expected to deteriorate, mainly in motor vehicle-related industries, partly due to the effects of developments in U.S. tariffs. The wage growth rate in fiscal 2026 may be lower than that in fiscal 2025.”
The BOJ’s quarterly Tankan business sentiment survey showed confidence among major manufacturers improved in December for the third straight quarter, as expected, confirming that firms have weathered the drag from stiff U.S. tariffs and setting the stage for the bank to continue raising interest rates gradually.
The Tankan diffusion index for major manufacturers inched up to 15 from 14 in September as expected. The index measuring sentiment among major non-manufacturers was steady at 34, coming in slightly softer than the median economist forecast of 35.
An upside surprise came from the index for smaller manufacturers, which jumped to 6 from 1, backed by lower raw materials costs and a surge in sentiment in the auto industry. That was well above the consensus call of 1. The index for small non-manufacturers ticked up to 15 from 14, just above the median projection of 14.
The Tankan also indicated that labor shortages persisted in many industries in the December survey and that the conditions are expected to become tighter in three months.
The business survey, however didn’t provide a clear picture as to how firms would finance wage hikes to secure quailed workers.
All-industry sales plans for fiscal 2025 were revised up in December from September but the 1.9% increase projected for the current fiscal year would be still lower than the 3.8% rise for fiscal 2024. All-industry current profit plans for fiscal 2025 were also revised up but combined profits are projected to dip 2.7% after a 5.6% gain in the previous fiscal year.