Japan's Wage Growth Spikes, But Yen's Rally Is Limited

The Japanese Yen surged on Tuesday after Japan reported its fastest nominal wage growth since 1997. The Bank of Japan had been waiting for this data, which showed a 4.7% year-over-year increase in July, above a 3.9% consensus. Real wages rose 2.4%, the seventh straight increase and the best in about five years.

This wage growth removes one of the Bank's objections to faster tightening: that raising rates would choke the wage recovery before it reaches households. Swaps markets put a quarter-point rate hike on September 18 at 98% before the data, but the Yen still gained only 38 pips in response.

The mechanism behind the number is structural rather than cyclical. Employers are bidding for a workforce that gets smaller every year, and corporate profits fund the raises. However, private consumption was flat in the second quarter, and real incomes turned positive only recently after a long run where inflation ran ahead of pay.