Japan’s December wage data showed improving nominal pay but another fall in real wages, keeping pressure on the BoJ to move cautiously after its December hike.

Summary:

• Japan’s real wages fell 0.1% y/y in December, extending a year-long contraction

• Nominal pay growth improved, but still lagged inflation enough to keep purchasing power negative

• Overtime pay slowed, hinting at softer private-sector momentum

• Real wages fell 1.3% in 2025, marking a fourth straight annual decline

• Data muddies the policy signal for the Bank of Japan after December’s rate hike

Japan’s wage data for December delivered a familiar but awkward message for policymakers: nominal pay is improving, but not fast enough to restore household purchasing power.

Government data showed inflation-adjusted real wages fell 0.1% year-on-year in December, extending a contraction that has now persisted for 12 consecutive months. While the pace of decline was the slowest since early 2025, the continued erosion underscores how stubbornly consumer purchasing power remains under pressure.

Nominal wages did show firmer momentum. Total cash earnings rose 2.4% y/y to ¥631,986, a clear pickup from November’s revised 1.7% increase. Regular pay climbed 2.2% y/y, while special payments — largely winter bonuses — rose 2.6%, suggesting companies continue to offer one-off compensation to offset cost pressures.

However, the quality of wage growth remains mixed. Overtime pay increased just 0.9% y/y, down from 1.2% previously, a moderation that points to softer labour demand in parts of the private sector. Overtime trends are closely watched as a real-time gauge of corporate activity, and the slowdown hints at caution among employers despite stronger headline pay growth.

On a full-year basis, the picture remains weak. Real wages fell 1.3% in 2025, marking the fourth straight year of annual real wage declines since inflation began overshooting the BoJ’s 2% target in 2022. That prolonged squeeze on incomes continues to weigh on consumption and reinforces concerns about the durability of domestic demand.

For the Bank of Japan, the data complicates the policy debate. Wage dynamics are a cornerstone of the BoJ’s framework for assessing whether inflation can be sustained without extraordinary stimulus. While nominal pay and base salaries are trending higher, the failure of real wages to turn positive suggests the wage-price cycle remains incomplete.

Markets are therefore likely to interpret the report as cooling near-term pressure for additional rate hikes, following the BoJ’s 25bp increase in December to 0.75%. Policymakers have repeatedly stressed that sustained real income growth is essential before tightening policy further, and December’s figures offer little confirmation on that front.

In FX markets, the data reinforces a narrative of gradual normalisation rather than acceleration, limiting upside for the yen unless inflation or spring wage negotiations deliver a clearer upside surprise. In rates, it supports expectations that the BoJ will move cautiously, balancing rising nominal wages against still-fragile household purchasing power.

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Market impact

• JPY: limited support as real wages remain negative; focus shifts to spring wage talks
• JGBs: reinforces cautious tightening path, anchoring front-end yields
• Equities: consumption-linked sectors still constrained by weak real incomes

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