A commonly raised point is that Shunto wage increases only apply to union members, and the March preliminary results only reflect wage increases from Rengo-affiliated unions, resulting in the data being non-comprehensive. We believe this observation is half right and half wrong.
The accurate part concerns Rengo's limited coverage with approximately 10 million union members in Japan, Rengo's Shunto survey only covering about 3 million members, accounting for just 30% of all union members. Moreover, when considering the entire workforce, Rengo's survey coverage drops to only 5%, which is quite small.
However, a crucial point is that smaller companies often use the wage increase rates agreed upon during this concentrated response period as a reference point for their own negotiations. This means that wage increases achieved by unions at large companies tend to have a ripple effect on wage trends at smaller companies. In conclusion, while the direct impact of the Shunto results published by Rengo only affects a small percentage of workers, these results remain somewhat significant, as they often serve as a benchmark for wage increases at smaller companies.
The BOJ’s concept of “solid” wage growth encompasses the Shunto results, as well as the breadth of the wage increases throughout the economy In the BOJ’s communications since its January policy meeting, the Bank seems to be more confident about the sustainability of wage increases.
The board members have been using the phrase “solid” or “steady” in describing the outlook for this year's Shunto . For example, in most recent BOJspeak by Deputy Governor Uchida on 5 March, he said “in the annual spring labor-management wage negotiations currently in process, wages are likely to continue rising steadily, following last year's solid wage increases (source: BOJ).” Regarding the magnitude of wage growth that satisfies the BOJ’s condition that wage growth is “solid”, it will be the degree that is consistent with the price stability target of 2 percent. We think more than a 3% base salary hike or a wage hike similar to last year may be one criterion. But Deputy Governor Uchida said that “we are not saying “solid wage increases” with a specific rate of increase in mind” and “our assessment of wage increases will be a comprehensive assessment, including all other factors (source: BOJ)”. We need to keep in mind that the BOJ does not use a specific rate of wage increases to determine mechanically whether “solid wage increases” have been realized or not.
In addition to the base pay hike figure in the Shunto , we think the breadth of the wage hike throughout the economy, in particular among the small- and medium- sized firms will be crucial for the BOJ in determining its additional rate hike. There has been a behavioural shift in Japanese companies’ wage and price setting, and the sustainability of this is what the BOJ is recently focused on. From this point of view, it is worth noting whether even small labor unions can achieve high wage increases. As the Shunto data do not fully cover the wage hike results for small- and medium-sized companies, we also need to take into account other data in gauging how widespread the wage hikes are in Japan. In this regard, the BOJ’s assessment about wage hikes in the BOJ’s Branch Manager’s Meeting report (next one due in April) will be as important as this year’s Shunto results. Our Japan economics team maintains its forecast for a rate hike in July 2025 and January 2026 as the main scenario.
Multiple factors have driven recent moves in USD/JPY, including market fatigue over US tariffs, optimism surrounding Europe's increased defence spending, and growing concerns about softer-than-expected US growth. However, we would strongly highlight that JPY stands as the second-best performing G10 FX year-to-date, largely supported by domestic factors – notably the BOJ's continued rate hiking cycle, which contrasts with many other central banks moving toward rate cuts.
Most of the BOJ policy board members have not clearly said where the Bank’s terminal rate will be in this cycle, but their recent comments suggest they’ve gradually become more concerned about upside risks of continued price increases . If there is an upside surprise in this year’s Shunto , especially following a 32-year high in the wage hike demand figure by Rengo released on 6 March, it’s reasonable to expect the BOJ will revise its near-term inflation forecast higher at its April meeting (Fig. 5), likely leading the market to price in a higher BOJ policy rate than currently expected.
Owing to the BOJ's hawkish stance, this has pushed JGB yields higher, with the benchmark 10yr yield reaching levels not seen since 2009 and exceeding 1.50%. Meanwhile, 10yr US Treasury yields have trended downwards since the beginning of this year. This widening divergence in interest rate differentials has caused persistent downward pressure on USD/JPY.
Although estimating the “fair value” of exchange rates remains contentious, we acknowledge the significant explanatory power of rate differentials for USD/JPY, in view of their historically high correlation. Our interest rate model, using 2024 data and extrapolating into 2025, suggests USD/JPY could trade approximately up to 2% below its current market levels, while expectations for further US tariffs might discourage the pair from completely converging to the interest rate differential (Fig. 6). Despite the recent disconnect between rate differentials and USD/JPY , we expect further downside potential for the pair as long as the BOJ maintains its hiking trajectory. We forecast USD/JPY to reach 140 by end-2025.
Some market participants argue that the recent sharp rise in long-term JGB yields reflects fiscal concerns in Japan, potentially constraining the BOJ's ability to continue hiking. However, recent communications from both the BOJ and Japanese government suggest otherwise .
The officials’ comments are in line with our analysis of the economic impact of the recent rise in long-term JGB yields on each representative economic agent in Japan , and the current level of the yield on its own is unlikely to trigger an imminent economic downturn. Nevertheless, the pace of the rise could adversely affect economic activity in Japan, and this explains why BOJ officials have been reiterating that the Bank is able to respond nimbly to an extraordinary sharp rise in the long-term yield, if needed, by using various operations.
In terms of the market’s positioning on the JPY, FX futures data from the CFTC indicate non-commercial investors had net long JPY positions, as of 25 February, and have increased to the largest size since 2016 (Fig. 8 ). This appears to be leading to some investor concerns about long JPY positions getting well-owned.
However, we shouldn’t be too sensitive to this result, as positioning data by type of investor show leveraged funds remain short JPY, while asset managers - typically longer- term investors - continue to build long JPY positions. The accumulation of long JPY positions appears to be partly driven by hedging against tariff risks, but with US equity prices starting to show signs of weakness, we believe asset managers are likely to maintain these defensive JPY positions rather than unwinding them prematurely. Furthermore, the position data should be used in gauging market sentiment, instead of reflecting entire FX market positioning, considering CFTC data only cover a very small portion of global FX turnover.
