Wells Fargo Economics expects Japan’s May labour cash earnings, due next week, to reinforce evidence of a sustained wage-price cycle and keep the Bank of Japan on a path towards policy normalisation. April data showed labour cash earnings up 3.6% year on year, while ordinary time earnings, the BoJ’s preferred gauge of underlying wage momentum, rose 3.3%. The bank also points to resilient GDP and a solid Q2 Tankan report as supportive macro signals.
Shuntō negotiations delivered average wage increases of more than 5% for a third consecutive year, effective from April, and the lag between settlements and realised pay is expected to underpin earnings growth in coming months despite limited union coverage. With inflation described as soft, the fading of government subsidies and the impact of a weaker yen on import prices are framed as drivers of a gradual pick-up. On that basis, Wells Fargo continues to forecast a 25 bps BoJ rate rise in Q3, most likely September, taking the policy rate to 1.25% by year-end.
Labour Data Strengthens Case For BoJ Policy Normalisation
With May’s labor cash earnings recently reported at a 3.8% year-over-year increase, we see clear support for the Bank of Japan’s path toward policy normalization. This confirms the wage-price cycle is taking hold, fueled by strong Shuntō pay deals that averaged over 5% for the third straight year. Therefore, we are positioning for a rate hike as soon as September.
Market Strategy: Positioning For Rising Rates And Yen Strength
Consequently, we are looking at opportunities to short Japanese Government Bond (JGB) futures. As the BoJ moves to raise rates, we expect bond prices to fall, offering a direct way to capitalize on this policy shift. This strategy is similar to positioning ahead of the initial policy shift away from negative rates back in 2024, which marked the start of this normalization cycle.
The strengthening yen is the other side of this trade, especially with USD/JPY currently hovering near 162.50. We are considering buying JPY call options or USD/JPY put options to profit from a potential drop below the 160 level. These instruments offer defined risk as we wait for the BoJ’s next move.
The latest national core CPI print of 2.7% also bolsters our conviction, as fading government subsidies begin to reveal underlying price pressures. This inflation data gives the BoJ the cover it needs to proceed with further tightening. We believe the market is still underpricing the pace of these future hikes toward a year-end rate of 1.25%.
