The main challenge Japan’s economy faces is that prices are rising too quickly for nondiscretionary items. Food and energy prices are the main culprit, making it difficult for households to increase their spending elsewhere in the economy. Even with the near-record wage increases seen last year, workers are still feeling strained by the rise in the cost of living. For example, real total cash earnings for workers, which are adjusted for inflation, fell 1.2% on a year-ago basis in February.6 After excluding volatile bonus payments, real contractual earnings were still down 2.5%.
Some of the weak wage growth is due to base effects. There was a huge spike in wages last January, which flattered wage growth throughout 2024. There was always likely to be a downward correction in growth at the start of this year, ahead of the spring wage negotiations between labor unions and employers, also known as shunto. In nominal terms, contractual wages were up a moderate 1.7%.7 That just wasn’t enough to overcome the strong headline inflation seen at the start of the year.
Fortunately, the spring wage hike announcements, as of this writing, appear to be modestly stronger than the wage hikes workers received last year. For example, the Japanese Trade Union Confederation announced that its member unions would secure wage increases of 5.5% on average this year,8 up from 5.1% announced last year. In addition, the government is attempting to accelerate the pace of minimum wage increases to provide more support to households. Prime Minister Shigeru Ishiba wants to raise the hourly minimum wage from 1,055 yen to 1,500 yen over the course of five years—this would require a 7% increase in the minimum wage annually.9
Against this backdrop, many consumers are understandably tentative. Still, consumer spending has improved modestly even after adjusting for inflation. For example, the real consumption activity index was up 1.3% from a year earlier in February.10 Although still fairly modest, that is a clear improvement from the 0.1% average growth in 2024.
Consumer spending may pick up relatively soon as people regain purchasing power from easing inflation. There has already been a slight moderation in food and energy prices. Fresh food prices eased from 22% year over year in January to 13.8% in March.11 Similarly, energy prices went from 10.8% year-over-year growth in January to 6.6% in March. The one area where there has been no evidence of moderation is in rice prices, which accelerated from 70.8% in January to 92% in March.12 However, the government auctioned 142,000 tons of its rice stockpile between March 10 and 12, which could alleviate rice price pressures soon.13
A stronger yen would also help ease price pressures of imported commodities such as food and energy. The yen has strengthened this year, going from 157.8 against the US dollar to 142.76 the week ending April 18.14 The appreciation of the currency is partly due to weaker sentiment in the United States market. US bond traders expect the Fed to cut rates more aggressively to support the economy as higher tariffs in the United States restrain growth. This has led to weakness in the US dollar compared to numerous currencies including the yen.15
At the same time, the Bank of Japan will likely continue to raise rates this year, although modestly. This should provide additional strength to the yen. However, the central bank has remained relatively cautious in raising interest rates, holding rates at 0.5% in March,16 a relatively accommodative stance compared to 3.6% inflation. Some of that caution is due to the potential headwinds coming from US trade policy, while some of it is also likely due to the desire to prevent the economy from backsliding into deflation.
