Strong wage growth has been the linchpin in Japan’s policy of maintaining low interest rates, and now it has arrived.

Paychecks for Japanese workers are going to be substantially larger. The Bank of Japan may find it simpler to decide to end its ultralow interest rate policy if that happens, which may happen as soon as next week.

Workers in Japan have been demanding greater wages to fight inflation, and some of the country’s major corporations have agreed to give their staff the highest pay boost in decades. Japanese labor unions engage in salary negotiations with employers at an annual event known as the Shunto in the spring. Last year, the average salary increase from the Shunto was 3.6%, which was already significantly greater than in prior years.

Statistics from the Japanese Trade Union Confederation (Rengo) show that unions are requesting a salary increase of over 5% this year, and they have a good chance of getting it.

A number of major corporations have complied with union demands, including Nissan and Toyota, and some have gone above and beyond, like Nippon Steel. Inflation of 2.6% in 2023, which is high by Japan’s standards, has prompted employees to demand higher wages, while an aging population has added to labor shortages.

On Friday, we will get the first wave of data from the Shunto, and according to Morgan Stanley, average wage rises might be as high as 5.2%. When the last round is released in the summer, the bank expects the result to be around 4.8%. Since it accounts for workers covered by a few smaller unions, that final tally is typically lower. Regular raises based on seniority are also a part of the salary increase. Despite the fact that the Shunto is only applicable to unionized employees, the findings still show a promising trend in earnings generally.

Fears of permanently high inflation may grip Western nations if a wage-price spiral were to materialize. In contrast, Japan should be proud of its robust wage growth since it may indicate more consistent consumption growth, which would be welcome after the country has struggled with deflation for the better part of a decade.

The strong employment market will also provide the Bank of Japan with additional leeway to consider ending its protracted negative interest rate policy. Fearing a return to deflation, Japan has refrained from boosting interest rates, in contrast to other major central banks. At their meeting next week on Monday and Tuesday, the Bank of Japan may feel more at ease hiking interest rates soon.

A rate hike has been anticipated by the market. So far this year, the yield on Japan’s one-year government bonds has increased by almost 0.15 percentage points, reaching 0.19%. In anticipation of rising interest rates, the Japanese yen gained over 2% versus the dollar during the previous two weeks. This expectation is heightened in light of growing speculation about potential rate cuts in the United States.

Over the last several years, the Japanese yen has been among the world’s worst-performing currencies. A robust job market, however, suggests that things may turn out differently this year.