The Bank of Japan cut its economic assessment for most regions on Thursday but signalled its confidence that wage hikes were broadening, leaving scope for another hike in the country's still-low interest rates.
In a quarterly report on regional economies, the central bank said there was hope that smaller firms would hike wages by the same amount as last year or more, after bumper pay hikes were offered to employees by their bigger counterparts.
"With strong wage hikes sustained for two straight years, companies are changing their behaviour to cope with rising labour costs," such as boosting investment to streamline operations, the BOJ said.
"As wage hikes broaden, many regions saw a steady increase in the number of firms that were passing on labour costs or were considering doing so," it said.
The BOJ's regional report will be among factors the board will scrutinise in producing fresh quarterly growth and inflation forecasts at its next rate review on April 25-26.
The BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy last month, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.
While the decision was driven partly by hefty wage hikes offered by big firms, the pace of further interest rate increases will likely be swayed by whether pay rises will spread to smaller firms in regional areas of Japan, analysts say.
In the regional report, the BOJ cut its assessment for seven of Japan's nine regions.
The downgrades were mostly due to the hit to consumption from unusually warm weather during the winter and slumping output due to auto production disruptions, the report said.
Japan's factory output unexpectedly fell in February due to production and shipment disruption at Toyota Motor and its small-car unit, which could weigh on the broader economy due to their huge presence in the country's manufacturing sector.
This article was written by Leika Kihara from Reuters and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.