Japan famously suffers from a number of economic maladies, some of which are generally seen as endemic and intractable.

Almost all macro observers are familiar, many intimately so, and traders whose careers date back at least a decade or two are likewise well-versed.

As such, Japan’s economic quagmire is a subject about which interested parties often have strong opinions that are reasonably well-informed. That’s a welcome intellectual reprieve in a world where, almost as a rule, the stronger the opinion, the less informed those expressing it tend to be.

One particularly vexing problem in Japan revolves around low and stagnate wages. Average annual pay is about $40,000 across the world’s third-largest economy.

To call that low for a highly-developed nation would be an understatement. It’s nowhere near the OECD average, and as of 2021, it was almost 44% below the US.

It’s not just low wages, but also the complete absence of wage growth, that bedevils the Japanese economy, which, for as long as many market participants can remember, has teetered rather precariously on the line between perpetual disinflation and outright deflation. The BoJ (and particularly the BoJ under the outgoing Haruhiko Kuroda) views the quest to reinvigorate wage growth as something akin to a religious imperative.

That brings us to Wednesday’s news that Fast Retailing, a corporate behemoth, is set to raise wages by up to 40%, in what Reuters perhaps prematurely described as “a clear sign that Japan’s rock-bottom salaries may be starting to budge after decades of deflation and cost-cutting.” (Generally speaking, it’s not safe to make unequivocal statements about the end of deflation in Japan.)

However premature it may be to herald progress, the Fast Retailing news was very notable. If you’re unfamiliar, Fast Retailing operates Uniqlo — it’s a big deal, both in an absolute sense and, perhaps more importantly, from a signaling perspective.

Of course, Fast Retailing isn’t the first domestic heavyweight to raise wages amid the highest inflation in 40 years, but it’s arguably the most visible.

Consumer prices in Japan are rising at a remarkable rate for a country accustomed to almost no inflation. Earlier this week, figures from Tokyo showed consumer prices excluding fresh food rose 4% in the capital last month, the steepest climb in 41 years.

The BoJ still says price increases aren’t sustainable, which in turn means monetary policy should remain accommodative. Certainly, the rapidly weakening yen combined with soaring energy prices played a starring role in 2022 given the implications for Japan’s import bill. Like Europe, Japan suffered a terms of trade shock last year.

But with each passing month, it’s becoming more difficult to make excuses. Nearly three quarters of core CPI components rose last month in Tokyo.

The BoJ wants wage growth, and they’re starting to get it — with caveats. Economy-wide base salaries need to rise, a tall order, perhaps, and real wages are falling fast. In fact, real cash earnings dropped at the quickest pace in eight years in November thanks to the very same inflation Kuroda is trying to facilitate. That, in turn, has the potential to erode household spending to the detriment of demand which, coming full circle, could eventually short circuit wage growth unless Japanese corporates intend to absorb higher labor costs in the form of lower margins.

Although economists blamed a one-off drop in bonuses for November’s 4% drop in real earnings, inflation-adjusted wages have fallen for eight months in a row. This is starting to mirror the chicken-egg problem seen across developed economies. You need healthy wage growth to achieve the kind of healthy inflation that drives economic activity, but higher inflation erodes wage gains, which can undermine consumption.

Nominal wages in Japan rose just 0.5% in November, far enough away from Kuroda’s 3% goal to be scarcely worth mentioning.

Wages have been flat in Japan for decades, even as average nominal pay across OECD nations has risen steadily.

Whether the Fast Retailing news was a watershed moment remains to be seen, but it’s something anyone interested in macro developments should take note of. A spokesperson emphasized that it was the first time in two decades the company implemented a group-wide pay raise. The same person said it was “urgent” that Japanese employers raise wages, and noted that Fast Retailing’s decision would make the company competitive around the world, where it operates thousands of stores.

If nothing else, the signaling effect could raise the stakes for annual labor talks this spring. Plainly, wages won’t be rising 40% for all Japanese workers, but between elevated inflation and a growing list of companies announcing higher salaries, the permafrost may be thawing.

Last month, the BoJ stunned markets by widening the band on its yield-curve control regime, which in the current environment just meant Kuroda decided to allow yields on 10-year JGBs to double from a ceiling of 0.25% to 0.5%. Predictably, the bank found itself compelled to defend the new cap repeatedly. Kuroda’s term ends this year, and it seems very likely the BoJ will turn incrementally more hawkish once he’s no longer at the helm.

For what it’s worth, Kuroda’s pay isn’t keeping up with inflation, even as it’s more than adequate. His salary rose less than half a percent during the most recent fiscal year, to $254,000. When queried by lawmakers last year about the impact of what counts as “hot” price growth in Japan, Kuroda said, of groceries, “It’s generally my wife who shops at supermarkets.”