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(Bloomberg) — Japan’s wages need to rise by at least 3% over the next two years to achieve the Bank of Japan’s sustainable inflation target, according to economists at Goldman Sachs.
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Nominal wages must increase by around 3%-3.1% in 2025 and 3.3%-3.4% in the following year to align with the BOJ’s envisioned inflation path, Goldman Sachs economists led by Akira Otani said in a report on Monday.
The note highlights the need for stronger pay growth to fully establish a virtuous economic cycle of rising incomes and prices, a condition that would support further monetary tightening by the BOJ. Japan’s nominal pay growth for 2024 was 2.8%, according to the labor ministry’s annual data.
Goldman’s economists said they continue to see rate hikes roughly twice a year, with the next increase coming in July. Should wage data clearly diverge from the trend that Goldman calculated as needed for the BOJ to achieve its stable inflation goal, rate increases could come faster or slower, they said.
Japan’s key inflation gauge has stayed at or above 2% for nearly three years, largely due to the weak yen driving up import costs. Meanwhile, the BOJ has said that the underlying inflation trend has continued to be below the 2% target, although it’s gradually moving in that direction.
Goldman said that compared to the early 1990s when 2% inflation was broadly achieved, contribution from service prices are lagging this time. The BOJ currently expects underlying inflation to reach 2% in the latter half of its forecast horizon through to the end of March 2027.
The central bank is set to announce its next policy decision on Wednesday and is widely expected to leave its benchmark interest rate unchanged amid concerns over global economic uncertainty and trade tensions. Most BOJ watchers anticipate the next rate hike in the summer, according to a Bloomberg survey last week.
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