According to the app Smart Finance, the Bank of Japan stated on Friday that the continuously rising minimum wage in Japan may primarily push up inflation by raising service prices, indicating confidence in the prospect of inflation continuing to reach the 2% target.

Sustained and expanding wage growth is one of the prerequisites for the Bank of Japan to raise interest rates, with rates currently close to zero.

The Bank of Japan said in a complete quarterly outlook report that by the end of the fiscal year ending March 2025, the average minimum wage is expected to rise by 5.1%, reaching a record level of increase. In areas where the minimum wage has been kept low, the increase is particularly significant.

The report stated: "If Japan's minimum wage continues to rise, it may push up prices, primarily service prices."

The Bank of Japan stated in the report that estimates show that for every 1% increase in the minimum wage, service prices measured by the consumer price index may rise by 0.07 percentage points.

The report stated that an analysis of Japan's GDP deflator index also shows that since 2024, the main driver of inflation has shifted from unit profit to unit labor costs.

Survey results indicate that Japan's inflation is increasingly being driven by rising labor costs rather than the transmission of rising material costs.

The Bank of Japan ended negative interest rates in March, and raised short-term interest rates to 0.25% in July as it believes Japan has made progress towards sustainably achieving the 2% inflation target.

Bank of Japan Governor Haruhiko Kuroda has stated that rising inflation must be driven by strong domestic demand and robust wage growth in order for the central bank to continue raising interest rates.

Due to the increasing cost of living putting pressure on Japanese households, the Liberal Democratic Party led by Prime Minister Shizo Abe has promised to raise Japan's average minimum wage by 42% to 1,500 yen per hour by 2020.

Despite significant wage increases in negotiations with labor unions this year due to a shortage of labor force, uncertainties remain about whether companies will continue to raise wages as slowing global economic growth hampers profits.

A Reuters survey shows that the Japanese economy is expected to significantly slow down in the third quarter due to cooling global demand, and high cost of living dragging down exports and consumer spending.

Core consumer inflation reached 2.4% in September, exceeding the Bank of Japan's 2% target set for over two years, but many analysts suggest that this growth is driven more by rising raw material costs rather than wage pressures.