In March, real wages fell by 2.1% year-on-year in terms of total cash earnings. More alarmingly, “scheduled wages”—which represent the underlying trend—dropped by 3.0%, marking the third consecutive month of decline. Scheduled wages have seen five straight months of worsening since October 2024 (when the drop was 0.3%), indicating that households are in dire straits. Even before accounting for inflation, nominal wages are disastrous; seasonal adjustments show a decline in scheduled wages for three months straight.
While the negative real GDP growth in the Q1 (January–March) period is concerning, these wage figures are even more critical. During the 2024 Shunto (spring wage negotiations), the Bank of Japan (BOJ) claimed to be hyper-focused on wages as a prerequisite for tightening. If that was the case, how did we get here? Why did they hike interest rates in January when the real wage growth rate had been worsening for five consecutive months? It is highly probable that the BOJ fundamentally misjudged the wage outlook.
Interest Rate Hikes as a Zero-Point Response
Raising interest rates is an act that reduces demand for borrowing and, as I have written in other posts, shrinks the amount of money in circulation. Its purpose is to cool the economy. As a response to cost-push inflation, this policy earns zero points. Throughout 2024, the narrative that “normalization should happen early” or “rate hikes are only natural” permeated through market analysts and economists. I firmly believe this view is mistaken.
The BOJ’s inflation paranoia has crossed a line. While I have refrained from harsh criticism of the BOJ in the past, I must now hold them accountable.
The Pathetic Stance of the Government
Even more disappointing, however, is the LDP-Komeito administration. As I have argued before, the government should provide a comprehensive analysis of the current economy, define a desirable inflation rate, and share this vision with the BOJ. The government must then pivot to proactive fiscal policy to drive real wage growth so that monetary policy is not overburdened.
Because the government continues to act as if simply keeping CPI at 2% is sufficient—despite no longer being in a deflationary state—the BOJ feels emboldened to hike rates without hesitation. The government needs to overhaul its policy, including shifting its target from CPI growth to real wage growth. If the current administration is incapable of this, they should step aside as soon as possible.
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