Japan's Minimum Wage and Inflation

By Leika Kihara

TOKYO (Reuters) – Japan's rising minimum wage is likely to push up inflation mainly through higher services prices, according to the central bank's report on Friday. This indicates confidence that inflation may sustainably hit the 2% target.

The Bank of Japan has stated that sustained and broadening wage increases are necessary for raising interest rates from the current near-zero levels.

The average minimum wage is set to rise a record 5.1% in the fiscal year ending March 2025, with significant increases noted in areas where wages were previously low. The BOJ mentioned: "If Japan's minimum wage continues to rise, that is likely to push up prices mainly for services."

Estimates indicated that a 1% increase in the minimum wage could raise services prices by 0.07 percentage points, as measured by the consumer price index.

An analysis of Japan's GDP deflator showed that inflation is increasingly driven by rising labor costs rather than higher raw material costs.

The BOJ ended negative interest rates in March and raised short-term rates to 0.25% in July, believing that Japan is on track to sustainably achieve its 2% inflation target.

Governor Kazuo Ueda has noted that rising inflation must be supported by robust domestic demand and solid wage growth for further interest rate hikes.

With living costs rising, Prime Minister Shigeru Ishiba's Liberal Democratic Party has pledged to increase the average minimum wage by 42% to 1,500 yen per hour by the decade's end.

Despite significant pay hikes during this year’s wage negotiations due to a labor shortage, there is uncertainty about whether firms will continue to increase wages amid slowing global growth.

A Reuters poll predicts Japan's economy sharply slowed in Q3 due to cooling global demand and high living costs impacting exports and consumption.

Core consumer inflation reached 2.4% in September, surpassing the BOJ’s 2% target for over two years, though analysts suggest this is still driven more by rising raw material costs than wage pressures.