Bank of Japan’s case to hike rates as union’s wage wins combine with Iran oil shock

The imported supply shock from war in the Persian Gulf is dominating headlines, but Japan also has uniquely homegrown inflation pressures.

Rengo, the nation’s largest labor organization, recently secured a 5.26% initial average wage hike for its members. That’s the third consecutive 5%-plus outcome from the closely watched “Shunto” wage talks. But there has been scant relief for Japanese workers as cost-of-living increases absorb those gains.

Bank of Japan policy makers view these sustained wage hikes as crucial for supporting consumption and promoting demand-driven inflation, which would allow the continued “normalization” of monetary policy. (It’s worth remembering that the central bank only ended the world’s last negative-interest-rate policy in 2024.)

Currently, the overnight indexed swap (OIS) market is pricing in a roughly 60% probability of a 25-basis-point rate hike in the near term — specifically, at the April or June meetings. Consensus forecasts compiled by FocusEconomics suggest a steady path of rate increases by the BoJ, with one quarter-point hike projected in the remainder of 2026 and another in 2027.

Throughout 2025, Japanese workers’ real wages fell every single month as price increases consistently outpaced pay raises.

While large corporations have largely met Rengo’s demands, smaller businesses have been less able to pass on rising costs to their customers — and, in turn, are less willing to raise wages. That’s an issue because small and medium-sized enterprises (SMEs) employ 70% of the workforce. This trend could be exacerbated if oil prices keep rising. (To blunt the impact of the current crisis, the government has released oil from its strategic reserves and reintroduced fuel subsidies.)

While inflation dipped below the BoJ’s 2% target in the first two months of 2026, that appears to have been a temporary distortion caused by government utility subsidies. Our in-house nowcasts suggest that inflation is bouncing back.