According to sources, the BOJ report should show a trend of rising wages | WSAU News/Talk 550 AM · 99.9 FM

By Leika Kihara

TOKYO (Reuters) – Japan's central bank will say in a report later this month that wage increases are widening across all companies, including smaller ones, according to sources familiar with the bank's policy, a move that suggests an imminent interest rate hike.

The findings are published in the appendix of a regular quarterly report analyzing Japan's regional economies and are based on surveys and hearings conducted by the central bank's branches nationwide.

Both the main report and its appendix are likely to highlight that more small and medium-sized firms are raising salaries, three sources said, a sign of rising wage growth, which is a prerequisite for interest rate hikes.

The findings will be among the factors the BOJ will closely scrutinize at its next monetary policy meeting on July 30-31, when the body will issue new quarterly growth and inflation forecasts.

The BOJ's regional report will be released on Monday when branch managers hold a quarterly meeting in Tokyo. The appendix will likely be released at a later date, the sources said.

The BoJ ended eight years of negative interest rates in March because it believed rising wages were likely to keep inflation sustainably around its 2 percent inflation target. Core consumer prices rose 2.5 percent year-on-year in May, the first time they have exceeded the BoJ's target for more than two years.

BoJ Governor Kazuo Ueda has suggested that further interest rate hikes could come if wage increases become broader and companies raise their service prices, pushing underlying inflation toward 2 percent.

Many market participants expect the BoJ to raise interest rates this year from current levels near zero, but there is disagreement over whether this will happen this month or later.

A survey released Wednesday by Japan's largest union, Rengo, found that companies have offered wage increases of 5.10 percent on average this year, the biggest increase in three decades.

However, the wage increase for small businesses was lower at 4.45 percent than for larger firms, which offered an increase of 5.19 percent. There is uncertainty about whether much smaller firms, which are not included in the Rengo survey, will be able to increase wages.

Through the BoJ's branch network, where representatives regularly speak with local company managers, the central bank can see whether the wage increases are also being implemented by small, regional companies.

About 70 percent of Japanese workers are employed in small and medium-sized enterprises (SMEs). Therefore, wage developments are crucial for whether inflation will reach the BoJ's two percent target in the long term.

(Reporting by Leika Kihara; Editing by Jacqueline Wong)