Japanese workers’ base salaries jumped the most since 1993, an encouraging sign that the underlying pay trend may start to support consumption and enable the Bank of Japan to raise interest rates again.

Base pay increased 2.5% in May from a year ago, the fastest growth since 1993, outpacing the 1.9% gain in the headline figure, the labor ministry reported Monday.

A more stable measure for full-time workers that avoids sampling issues and excludes bonuses and overtime pay rose by a record 2.7%, a firmer indication of improvement in the overall wage trend.

The data come after the nation’s biggest umbrella group for unions said it secured an average wage increase of 5.1% for its workers this year, the biggest gain since 1991.

Monday’s figures may bolster confidence in the view a virtuous cycle is emerging of wage and consumption growth that generates demand-led inflation. That’s a dynamic that would support moves by the BOJ to further normalize policy including the possibility of raising rates as soon as this month after it hiked in March for the first time in 17 years.

"Along with signs that inflation is also going the right way, we think the reading will give the Bank of Japan strong confidence that the wage-price cycle is starting to spin — and give policymakers a nod to hike rates at the July meeting,” Bloomberg economist Taro Kimura said.

Still, with wage gains continuing to lag inflation and ongoing weakness in consumer spending, economists see reasons for the central bank to remain cautious.

"The BOJ isn’t going to refer to just one month’s data, so the impact of this result on the central bank’s decision will limited,” said Toru Suehiro, chief economist at Daiwa Securities. "Private consumption figures are still weak and that needs to be closely watched, making a rate hike in July difficult.”

The yen was largely unmoved after the report, an indication that investors also didn’t see the array of figures as a game-changer for the central bank. Complicating the picture was the weaker-than-expected headline figure, though it was dragged lower by falling bonus payments.

One in three economists surveyed by Bloomberg last month sees the bank hiking rates at its board meeting concluding on July 31, when authorities are also set to unveil plans to reduce bond purchases and update their economic outlook.

So far, the evidence on pay increases boosting consumption is mixed. A gauge of household spending released last week showed that expenditures unexpectedly fell in May by 1.8% versus the same period a year earlier. Other figures showed retail sales growth picked up to a pace that beat consensus estimates that same month.

Inflation continues to pressure household budgets. Monday’s figures showed that real cash earnings fell 1.4%, sliding for a 26th consecutive month. The country’s key price indicator rose 2.6% in May, remaining at or above the BOJ’s 2% target for over two years. Persistent weakness in the yen has heightened fears that cost-push inflation may further squeeze consumers.

Prime Minister Fumio Kishida is also looking for signs of resilient spending as he hopes to restore his support ahead of a party leadership contest in September as well as a potential general election. To mitigate the impact of inflation on households, the prime minister said last month he would reintroduce utility subsidies starting in August.

Yuriko Koike’s victory in the election for Tokyo governor on Sunday ahead of opposition parties was a mildly positive outcome for Kishida. But the failure of his ruling party to win more than two out of nine local government seats up for grabs in the metropolis shows Kishida’s support levels are still on weak footing.

Finance Minister Shunichi Suzuki said Friday that inflation remains a concern despite the significant pay increases of late, adding that recent price increases have partly been driven by higher energy prices and the weak currency.

Still, the uptick in base pay supports the case for some optimism. Many households received one-off tax rebates in June, and there may be more upside for pay trends.

According to Morgan Stanley, wage increases take time to show up in pay packets. In 2023, fewer than half the firms that pledged wage gains in spring negotiations administered those increases by May, the bank said.

Base pay for full-time workers is likely to hit 3% around July once the annual wage hikes are more fully reflected in the data, Suehiro said. He expects real wages to turn positive in the third quarter, helped by the latest utility subsidies.

Tightness in the labor market is expected to help maintain upward pressure on wages. The BOJ’s latest tankan survey showed that businesses are increasingly facing labor shortages, particularly among non-manufacturers, which experienced the worst manpower constraints in more than 30 years.

The BOJ has said it expects private consumption to recover after four quarters of declines, potentially underpinning an economic recovery.

"If the data goes the BOJ’s way, I think it will hike in September or October,” Suehiro said.