By Megumi Fujikawa
TOKYO--Japanese companies are poised to give workers their most significant pay raise in 35 years, strengthening conditions for another interest-rate hike at a time when the fallout from the war in the Middle East has muddied the outlook for Japan's economy.
Preliminary data from the nation's largest labor union group, known as Rengo, showed that 1,100 members secured wage increases of 5.26% on average this year. The figure was slightly higher than last year's 5.25% gain and would mark the steepest climb since 1991.
"While conditions vary by industry and sector, we believe this outcome is the result of labor and management sharing a common understanding of the importance of investing in people-which leads to sustainable corporate growth and improved productivity for Japan as a whole," said Tomoko Yoshino, president of the Japanese Trade Union Confederation, as Rengo is formally known.
Bank of Japan Gov. Kazuo Ueda is closely watching Japan's annual spring negotiations, known as shunto, to confirm that wage growth is keeping pace with prices. That has always been a core priority for the central bank, and one that has taken on more importance as fighting in the Middle East sends energy prices soaring, raising the threat of slowing growth and quickening inflation.
That is doubly negative for the wage-price harmony the BOJ wants to create. If the commodity price shock sparks cost-push inflation, consumer demand will suffer. If it squeezes corporate margins, businesses could be more reluctant to raise wages.
Japan's industry is already starting to suffer from the Middle East conflict, Capital Economics said in a report.
While the country has ample reserves of crude oil, it is heavily reliant on imports of other petroleum products from the region, said Marcel Thieliant, head of Asia-Pacific at CE. Around 70% of Japan's consumption of naphtha, a key feedstock for plastics, comes from the Middle East. Those stockpiles only last about 20 days, and half of all refiners that rely on naphtha to make plastic products have already cut output, Thieliant pointed out.
"Japan's industry will also suffer from weaker sales in the Middle East," the economist said, as manufacturers struggle to deliver goods to the region. The car industry will be particularly affected as the Middle East accounts for 15% of Japan's vehicle exports.
And the Middle East is only one worry, said Stefan Angrick at Moody's Analytics. U.S. tariffs, stiffer foreign competition, and trade threats from China are added concerns, the economist said.
The Japanese central bank said it is monitoring the situation closely, but has stuck to its stance of continuing to seek rate hikes, pointing out that domestic economic conditions were solid prior to the escalation of geopolitical risks.
At its meeting last week, the BOJ left its policy rate unchanged at 0.75%, citing uncertainties around the conflict while saying it wants more time to assess the impact on the economy.
Despite the gloomy backdrop, the Rengo results signaled continued wage growth momentum. Major Japanese companies--such as automakers Toyota Motor, Honda Motor and electronics conglomerate Hitachi--met their labor unions' demands in full. Given the stickiness of domestic inflation, sustaining real wage gains will be vital to bolstering demand.
While the Rengo data primarily reflects larger corporations, the BOJ's Ueda said the trend of pay raises is extending to smaller firms. An upcoming meeting of central bank branch managers in early April is expected to offer further insight into wage trends.
The negotiations remain a focal point for policymakers and economists, setting the benchmark for non-unionized smaller businesses, which employ the vast majority of Japan's workforce.
"If this trend continues among small and medium-sized enterprises, and the situation in the Middle East calms down, it will be viewed as evidence that the virtuous cycle of cost pass-through and wage increases is being maintained," said Harumi Taguchi, an economist at S&P Global Market Intelligence.
Taguchi expects the BOJ to raise interest rates to 1% in July. The Overnight Index Swaps market indicates that investors see a roughly 60% chance of a hike as early as April.
Write to Megumi Fujikawa at megumi.fujikawa@wsj.com
(END) Dow Jones Newswires
03-23-26 0402ET
