September 2,2014,13.30 JST

Another progress made toward eliminating deflation

The wage report for July delivered a set of good news for the Japanese economy. Total wage grew by 2.6% year on year (YoY) in July, the highest growth rate since January 1997. The YoY growth rate in the basic wage was much more sober at 0.7% YoY in July, but the bonus wage component grew as much as 7.1% YoY, boosting the total wage growth. The 0.7% growth in the basic wage is also not insignificant. As stale as it may seem from an international perspective, it is the highest growth in Japan since March 2000.

 Source: MHLW, JMA.

Details reveal that the employees in large corporations are compensated even better. For regular employees working for businesses with more than 30 employees, their total wage rose by 4.1% YoY in July, with its basic wage component rising by 1.4% YoY.   

In order for the participants in the Japanese economy to feel confident that the deflation is a thing of the past, a robust wage inflation is a necessary ingredient. Even with the temporary boost from the summer bonus, the total wage growth in July is still lower than the consumer price inflation (3.4% YoY in July). The recent acceleration in the wage growth is a very welcome trend though.

 Source: MHLW, JMA.

Policy implication: 

The July wage report provides a timely relief for policy makers who have been starved of good news recently. The latest news on private consumption trend released last Friday was quite dismal. See our report here. With a fresh news of wage inflation, policy makers can now claim that wage is gradually catching up with the consumer price inflation and therefore, their logic goes, the Japanese private consumers can take another beating from the sales tax hike in 2015. The good news from the wage data will help cement the scheduled consumption tax rate hike in 2015 that Prime Minister Abe needs to formally announce by December this year.