Japan Labour Cash Earnings (December 24)

Regular earnings growth will hold strong at just under 3% for most of this year

Growth in base pay rose the most since 1992 in December, and we think it will continue to hold strong in this year. According to today’s preliminary estimate, labour cash earnings rose by 4.8% in December, which was much higher than the 3.9% increase in November and is also its strongest showing since the 1990s.

Much of that strength in overall labour cash earnings growth is due to growth in bonus payments. While bonus payment growth weakened from 24.9% y/y to 6.8% y/y, the weight of bonus payments in overall pay rose sharply from 7.5% to 53.9% as a result of the winter bonus season. This meant that bonus payments contributed a robust 3.7%-pt to total wage growth compared to the 1.9%-pts contribution it made in November. However, the weight of bonus payments will likely have dropped sharply after December due to the end of the winter bonus season.

At the same time, regular earnings growth rose from 2.5% to 2.7%. However, because its weight in overall pay fell from 85.8% to 42.8%, it merely contributed 1.2%-pts to overall labour cash earnings compared to the much stronger 2.1%-pts contribution the previous month. It’s worth noting that the preliminary estimate for regular earnings growth has been revised down in 10 out of 11 months last year, with the last revision in November being 0.2%-pts. We suspect it will also be revised down in December as well. Meanwhile, the 1.3% y/y rise in overtime pay growth didn't move the needle.

Looking ahead, we expect that the strength in regular wage growth has further to as we think that this year’s Shunto will result in pay hikes of a broadly similar magnitude as last year. Accordingly, we think that both regular earnings growth and overall labour cash earnings growth will hold strong at just under 3% for most of this year.