Accelerating Wage Growth Lays Groundwork for Further Rate Hikes—Japan’s Tightening Path Comes Into Focus

TradingKey - Japan’s April wage data showed that core wages rose 2.5% year-over-year, marking the 20th consecutive month above the 2% threshold and indicating a certain level of resilience in the upward trend. However, real wages still declined 1.8% year-on-year, suggesting that inflation continues to erode household purchasing power.

Although rising nominal wages provide the Bank of Japan (BOJ) with a basis for policy adjustments, the figure remains short of the central bank’s informal target of around 3%. As a result, the BOJ is expected to maintain a cautious approach to rate hikes in the near term.

Market expectations currently point to a possible additional rate increase in the second half of this year, which would lift the short-term interest rate from the current 0.1% to around 0.25%. If wage and inflation data in the third quarter continue to show positive interaction, a further modest hike in early 2026 cannot be ruled out. However, uncertainties surrounding U.S. election-related tariffs, yen volatility, and divergent global monetary policy trajectories could act as restraining factors.

Notably, the BOJ has recently begun gradually reducing the scale of its government bond purchase operations—an action widely seen as an important signal of its exit from ultra-loose monetary policy. While not a formal rate hike, this move reflects a shift in the central bank’s focus from economic stimulus toward inflation control. Scaling back bond purchases helps ease downward pressure on long-term interest rates, improves financial institutions’ profitability, and creates room for future monetary tightening.

Overall, Japan’s monetary policy is entering a new phase characterized by fine-tuning and observation. Sustained nominal wage growth and a broader corporate trend of salary increases are providing support for policy normalization. However, declining real incomes and weak domestic demand remain key constraints. The future pace of policy adjustment will largely depend on whether the interplay between inflation and wage growth can evolve into a virtuous cycle.