Japan’s Wage Negotiations Signal Strong Pay Hikes Despite Tariff Pressures

Japan’s early outlook for next year’s annual wage negotiations suggests another round of strong pay increases, even as U.S. tariffs squeeze corporate profits. This momentum strengthens expectations that the Bank of Japan (BOJ) may continue raising interest rates as it monitors wage and inflation trends. BOJ Governor Kazuo Ueda recently emphasized the need for “a bit more data” on wage talks, particularly from industries heavily affected by U.S. levies.

Labour unions are preparing to push aggressively for sizable pay hikes once again. Rengo, Japan’s largest labour federation representing seven million workers, plans to demand wage increases of at least 5% in 2026, mirroring the target that led to the biggest pay raise in 34 years during 2025 negotiations. Automaker unions—among the most impacted by U.S. tariffs—also intend to maintain robust wage demands despite profit headwinds.

Japan’s wage negotiation cycle typically begins with unions drafting demands in late autumn, followed by formal talks early the next year and final agreements by March. While rising U.S. tariffs may lead some companies to resist union proposals, manufacturing sentiment remains solid. A recent Reuters poll shows confidence hitting its highest level in nearly four years, supported by yen weakness and steady orders.

Additionally, Japan’s tight labour market continues to pressure companies to raise pay. Another Reuters survey revealed that 72% of firms plan to lift wages in 2026 at a pace similar to 2025. Labour shortages are especially severe in hospitality; Watami, for example, will implement multi-year pay increases averaging 7% annually from 2026 for its full-time staff.

Economists expect average pay hikes to remain near or above the 5% threshold. Forecasts from the Japan Center for Economic Research point to an average 4.88% increase next year, while Dai-ichi Life Research Institute anticipates around 5.2%.

Prime Minister Sanae Takaichi’s administration is also pushing for wage growth that outpaces inflation, adding political pressure on companies. Keidanren, Japan’s influential business lobby, is reportedly preparing guidance urging firms to maintain strong wage momentum.

More clarity on BOJ policy may come on December 1, when Ueda addresses business leaders in Nagoya. A slight majority of economists now expect a rate hike by December, supported by a weakening yen and firm wage expectations.