(April 8): Japanese workers’ real wages fell in February for a 23rd consecutive month after consumer price growth accelerated, exerting a drag on spending, in an outcome that will likely keep the central bank on hold for now.

Real cash earnings for workers dropped 1.3% from a year earlier, the Labour Ministry reported on Monday, a steeper decline than in the previous month. Economists forecast a 1.4% retreat. Nominal wages grew 1.8%, in line with the consensus estimate.

The latest decline in real wages comes as growth in consumer prices accelerated to 2.8% in February, the quickest pace since November.

Last fiscal year, Japanese workers received the largest wage increases in three decades, but the pace lagged inflation, which has stayed at or above the Bank of Japan’s (BOJ) 2% target for almost two years. Households have cut back on spending every month for the last year as a result.

The BOJ is of the view that this dynamic is poised to shift, a key factor in its March 19 decision to end its zero rate policy with Japan’s first rate increase since 2007. Japan’s biggest umbrella group for unions reported that annual wage negotiations with companies resulted in commitments to raising pay by more than 5% this fiscal year, the biggest increase in more than 30 years, and one that would comfortably outpace inflation, which is expected to slow to 2.3% in 2024.

“I expect real wage growth to turn positive in the middle of this year, when significant wage gains from pay negotiations will be reflected in payrolls and inflation will slow down,” said Kota Suzuki, an economist at Daiwa Securities.

BOJ governor Kazuo Ueda said in a recent interview with local media that the bank ended its large-scale monetary easing programme because the certainty for attaining a virtuous cycle in which wage gains feed into demand-led price gains had risen to 75%. He added that the likelihood of attaining the bank’s inflation target will steadily rise from summer through autumn.

The BOJ will release its latest inflation forecasts when the board meets later this month.

In a bright sign for wage trends, Monday’s report included data for full-time workers that avoid sampling problems and exclude bonuses and overtime pay. The category showed growth of 2.1%, staying at or above the 2% threshold for a sixth month.

Japan’s ageing and graying society has led to chronic labour shortages, forcing companies to compete for increasingly scarce human resources. More than half of companies surveyed said they face a shortage of permanent staff, the highest since 2018, and last fiscal year the number of firms that went bankrupt due to insufficient workers doubled to 313, the most ever, according to Teikoku Databank.

Meanwhile, the outlook for prices remains uncertain. The government’s plan to end utility subsidies at the end of May is expected to push prices higher into the summer. Another potential factor is the yen. The currency has been fluctuating near a 34-year low against the dollar, a development that will keep upward pressure on prices for imports of food and raw materials.

“If real wages become positive, it will make it easier for the BOJ to move,” said Suzuki at Daiwa Securities.