Early signs for Japan 2026 wages bolster case for near-term BOJ rate hike

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By Makiko Yamazaki and Leika Kihara

TOKYO (Reuters) -Early signs on Japan’s annual wage negotiations for next year point to another round of solid pay hikes despite profit pressure from U.S. tariffs, bolstering the case for the Bank of Japan to raise interest rates further.

The wage outlook has drawn renewed attention after BOJ Governor Kazuo Ueda said he wanted “a bit more data” on the initial momentum of next year’s wage talks – notably whether firms hit by U.S. tariffs would keep lifting pay.

Labour unions have already made clear they will again demand bumper pay hikes. Sustained wage growth would underpin private consumption, giving the BOJ confidence to raise rates without derailing Japan’s economic recovery. Despite hefty increases in recent years, real wage growth has remained negative as core consumer inflation has held above the BOJ’s 2% target.

Rengo, Japan’s largest labour union umbrella group, with 7 million members, is seeking wage hikes of 5% or more in 2026. That is what Rengo asked for in 2025, resulting in the biggest pay hike in 34 years.

The top union for automakers, among the industries hit hardest by U.S. tariffs, also has no plans to scale back its wage demands at labour talks for next year despite profit squeezes, its chief told Reuters this month.

Japan’s annual wage negotiations typically start with unions drafting demands late in the closing year, followed by formal talks early the next year, with settlements announced in March.

Companies, to be sure, may not heed union demands on 2026 wages as the hit from higher U.S. levies on shipments of Japanese goods is likely to intensify in coming months, clouding the outlook for the export-reliant economy.

But so far manufacturers are holding up, with a Reuters poll this month showing sentiment hit a nearly four-year high in November, buoyed by softness in the yen and solid orders.

A tight labour market is also likely to pressure companies to stick with generous pay hikes. A separate Reuters survey this month showed 72% of respondents intend to raise wages next year at about the same rate as in 2025.

The strain from labour shortages is particularly acute in the restaurant industry. Gastropub chain operator Watami said it will offer multi-year hikes averaging 7% annually from 2026 for about 1,200 full-time employees in Japan.

“For now, overall momentum looks firm, with July–September earnings generally solid,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, adding that the biggest question was whether average pay hikes would cross the 5% line.

A November survey by the Japan Center for Economic Research showed economists projecting that wage hikes would average 4.88% next year. That is higher than the 4.74% estimated in January for this year’s wage talks, which resulted in a 5.52% increase.

“Companies have plenty of scope to raise wages,” with profits remaining elevated, said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute. He expects hikes averaging 5.2% in next year’s wage talks, slower than this year’s but exceeding 5% for three straight years.

UEDA TO SPEAK TO BUSINESS EXECUTIVES IN NAGOYA

Companies may also face pressure for wage hikes from the new administration of Prime Minister Sanae Takaichi, who has vowed to build a strong economy in which wage gains outpace inflation.

Domestic media have reported that Japan’s biggest business lobby, Keidanren, will stress the need to maintain “strong wage momentum” in guidelines due in January to member companies for next year’s wage talks.

BOJ Governor Ueda told parliament on Friday the central bank was still in the midst of gathering data and information on the wage outlook, including from its branches nationwide.

“The BOJ will discuss the feasibility and timing of an interest rate hike at upcoming meetings looking closely at various data and information,” he said.

While the outcome of wage negotiations at big firms will not become clear until March, some executives may drop hints on their 2026 wage plans as soon as next month, analysts say.

More insight on the timing of the BOJ’s next rate hike could come on December 1, when Ueda speaks to business executives in the central Japan city of Nagoya, home to auto giant Toyota Motor Corp.

A slim majority of economists polled by Reuters expect the BOJ to raise rates in December, a case strengthened by the yen’s slide to a 10-month low against the dollar.

(Reporting by Makiko Yamazaki and Leika Kihara; Additional reporting by Kentaro Okasaka and Kentaro Sugiyama; Editing by Tom Hogue)