TOKYO, Oct 22 : Japan's largest labour union group Rengo unveiled a more ambitious wage bargaining policy for next year's annual labour negotiations on Thursday, setting a target centred at a pay hike of 6 per cent while maintaining a minimum benchmark of 5 per cent or more.

The move marks a shift from previous years, when Rengo called for wage increases of at least 5 per cent, as it seeks to reinforce wage-growth momentum after Japanese workers secured average pay gains above 5 per cent for the past three years amid persistent labour shortages.

The umbrella group, which represents about 7 million workers, sets wage targets that serve as guidance for its member unions, marking the start of a closely watched bargaining season that will help shape expectations for the Bank of Japan's interest-rate path. The new 6 per cent midpoint target, which includes a 4 per cent base pay increase, is meant to send a message that 5 per cent should be viewed as a floor rather than a target, Rengo said.

The target does not necessarily signal a dramatic increase in actual wage demands, however, as Rengo member unions sought average pay hikes of 5.94 per cent in the 2026 wage round, which resulted in an average increase of 5.01 per cent.

RISKS OF INFLATION OVERSHOOT Despite the more assertive target from Rengo, economists expect actual wage settlements in 2027 to remain broadly similar to this year's level of around 5 per cent.

"Chronic labour shortages, sturdy corporate profits and a declining labour share of income will justify wage gains broadly comparable to 2026 levels," said Takayasu Kudo, senior Japan economist at Bank of America Securities Japan.

While robust pay growth was previously welcomed as a means of lifting inflation towards the central bank's 2 per cent target, stronger wage gains may carry different implications now that the BOJ has shifted its focus to keeping underlying inflation anchored around that level.

Wage hikes of around 5 per cent may represent a "sweet spot" for the BOJ as well as workers, said Naoki Hattori, chief Japan economist at Mizuho Research Institute.

"Pay hikes larger than that could force companies to pass on labour costs to prices further and risk a wage-price spiral that pushes inflation above the BOJ's 2 per cent target," he said. Japanese wages were stagnant for decades until 2022, when rising raw material costs pushed up inflation and piled pressure on firms to compensate employees with higher pay. Strong wage growth in recent years has helped lift real wages back into positive territory, but Japan still ranks near the bottom among advanced economies in purchasing power parity-adjusted wage comparisons.

Seeking to raise Japan's wage levels in international rankings, Rengo also set a medium-term target for the first time, aiming to increase wages by 15 per cent from current levels by 2030.

Rengo will formally approve its 2027 wage policy in December, after which individual unions will draw up their demands. Annual wage negotiations typically culminate in March, when major firms respond to union requests.