In May, Japan's real wages encountered the largest decline in nearly two years.

Real Wages Decline Continuously,Quality foreign exchange trading introduction Showing Household Pressure

The latest data released by Japan's Ministry of Health, Labour and Welfare on Monday indicates that Japan's inflation-adjusted real wages fell by 2.9% year-on-year in May 2025, marking the largest decline since September 2023 and the fifth consecutive month of negative growth. This means that against a backdrop of high prices, the real income of ordinary Japanese households continues to shrink, increasing the burden of living and suppressing people's daily consumption capacity.

This data highlights the long-term pressure inflation has exerted on income growth. Although Japan's economic recovery has shown positive signs in certain areas, rising prices continue to outpace wage growth, leading to reduced disposable income and challenging family financial situations.

Price Surge Far Exceeds Wage Growth

Data from Japan's Ministry of Finance shows that consumer prices rose 4% year-on-year in May, while nominal cash income increased by only 1%, significantly lower than the April increase. This signifies that wage growth is lagging far behind the price increase, with persistent price rises eroding consumer purchasing power, forcing more families to cut back on spending to cope with rising daily expenses.

Notably, the basic wage in the wage structure, which is used for daily expenses, grew by 2% year-on-year, while overtime pay increased by only 1%, significantly slower than previous months. Simultaneously, special payments like bonuses dropped substantially by nearly 19%, which has weakened overall wage growth and added further pressure on household income.

Slow Wage Growth in SMEs Becomes a Bottleneck

Despite the announcement by Japan's major unions that the average wage increase for union members reached a 34-year high, this increase has not significantly improved overall wage levels. The Ministry of Health, Labour and Welfare points out that the results of spring wage negotiations usually only fully reflect in wage data by summer, and small and medium-sized enterprises (SMEs) in Japan, due to limited profitability, see wage adjustments lag considerably behind large corporations.

As SMEs account for a higher proportion in government statistics, their slow pace of salary increases further drags down overall wage growth. The divided labor market and conservative employment trends among companies are slowing the overall wage increase pace, affecting the recovery of Japanese household income.

Limited Consumption Recovery, Economic Revival Faces Uncertainty

Although data shows household spending recorded its fastest growth in three years in May, weak wage growth and persistently high prices may limit the sustainability of consumption recovery. If wages do not grow effectively, families might find it difficult to maintain high spending levels, posing obstacles to future consumption rebounds.

Wage and consumption trends are also key policy focuses for the Bank of Japan. The Bank currently maintains a cautious attitude towards monetary policy, closely observing the relationship between wage growth and price changes to determine whether adjustments are needed to support stable economic recovery.

Yen Exchange Rate May Be Under Pressure, Economy Needs to Find Balance

If wage growth remains sluggish and price pressures persist, market confidence in Japan's economic recovery may weaken, putting downward pressure on the yen exchange rate. Amid increasing global trade uncertainty, the impact of US tariff policies, and Japan's domestic structural issues, the Japanese economy needs to find a balance between stimulating wage growth and controlling inflation.

Achieving sustained wage growth and stable price levels will be crucial to keeping Japan's economy on a healthy cycle. The government and the Bank of Japan will need to coordinate responses to the impact of rising prices on household finances and help SMEs enhance their wage-increase capabilities to support household consumption and continuous economic recovery.

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