Bank of Japan signals progress in wage, price hikes

By Leika Kihara

TOKYO (Reuters) -The Bank of Japan (BOJ) said labour shortages are prodding smaller firms to hike wages and pass on rising costs through price increases, signaling confidence the country was making progress toward durably achieving its 2% inflation target.

The optimistic assessment, made in a summary of discussions at the BOJ's meeting of regional branch managers, may heighten the case for the central bank to raise interest rates as soon as its next meeting on July 30-31.

"Many regions reported that big firms' big pay hikes in this year's wage negotiations were spreading to small and medium-sized companies," according to the summary of the BOJ's quarterly meeting.

The assessment compared with that of the previous meeting in April, when the BOJ said there were "hopeful signs" solid wage increases among big companies would spread to smaller firms.

Some smaller regional firms decided to prioritise raising pay to retain or hire workers, even if they were not earning sufficient profits to make up for the higher cost, it said.

Many regions also saw companies passing on rising costs, or considering doing so, particularly those in the services industry, the BOJ said in the summary.

The BOJ said consumption was "firm as a whole," with robust spending by inbound tourists making up for soft consumption among households hit by rising living costs.

The central bank's view on wage developments will be among key factors its board will scrutinise at this month's policy meeting in setting interest rates as well as fresh quarterly growth and inflation projections.

Government data released earlier on Monday showed Japanese workers saw their average base pay climb 2.5% in May, the fastest pace in 31 years, with part-time workers notching up particularly strong gains.

(Reporting by Leika Kihara; Editing by Kim Coghill and Sam Holmes)