Real wages are what remains of your earnings after stripping away the impact of price increases. The growth rate is simple math: the nominal wage growth rate minus the CPI inflation rate.
When real wages rise, household purchasing power increases, fueling personal consumption. A surge in consumption encourages capital investment, which improves the labor market and, ideally, leads to further real wage growth. This is the exact definition of the “autonomous economic expansion” that the government and the Bank of Japan (BoJ) are striving for. Of course, if this cycle overheats, labor shortages would push inflation well beyond their targets—making real wages a powerful indicator for measuring inflation concerns.
To judge whether the economy is moving in the direction the BoJ hopes for, looking at real wages is far more appropriate than staring at the 2% CPI target itself. It certainly aligns more closely with the actual economic sentiment of the average consumer.
The Grim Reality: 20 Months of Decline
So, what do the actual figures show? As of November 2023, real wages fell by 2.5% year-on-year, marking the 20th consecutive month of decline since April 2022. It is painfully clear that we are nowhere near the wage-led autonomous expansion mentioned above. While the inflation rate remains above the BoJ’s 2% target, this is by no means a desirable economic environment. For the time being, economic policy must remain stimulative.
The 2023 Shunto (spring wage negotiations) resulted in an average pay raise of +3.58%—the highest since 1993 (+3.90%). Yet, even a hike of this magnitude was insufficient to offset the rising cost of living.
A Turning Point in 2024?
There is, however, an expectation that real wages will flip into positive territory at some point. The logic is as follows:
- Inflation is Cooling: The primary drivers of inflation—the weak yen and high energy prices—are not permanent. With Western economies cooling down due to interest rate hikes, further aggressive increases in energy costs or currency depreciation are unlikely in the near term. In fact, energy spikes peaked in 2022, and the yen’s rapid slide slowed in 2023. While long-term trends may vary, these are usually cyclical (moving in waves over several years). Consequently, the consensus is that the CPI growth rate will decline in 2024.
- Wage Resilience: Since the Shunto negotiations reflect the previous year’s price hikes, the average wage increase for 2024 is likely to remain relatively high.
If 2024 sees a lower CPI growth rate combined with these sustained wage hikes, real wages could finally turn positive. The BoJ is likely monitoring this delicate transition with extreme caution.
The Elephant in the Room
If real wages do turn positive, it could spark an autonomous economic recovery. However, there is a major “if”: as long as the government doesn’t do anything foolish. By that, I mean tax hikes or “reforms” to social security that increase the burden on citizens. Personally, I am quite pessimistic on this front—but as that is a separate debate from real wages, I will leave it there for today.
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