Tariffs, declining real wages, slowing growth: Japan's central bank has its work cut out

Wage data highlights that inflation could be taking a substantial bite out of incomes in Japan, despite wages in the country rising

Bank of Japan faces a challenging scenario, with analysts differing in the central bank's path forward

Japanese yen banknotes

Bloomberg | Bloomberg | Getty ImagesThe Bank of Japan faces a stiff challenge as it strives to normalize its monetary policy at a time when growth has been slowing, while steep U

Tariffs further threaten the country's exports-driven economy

Declining real wages have compounded the BOJ's troubles

Real wages dropped at their fastest pace in 20 months in May, pressuring the central bank to raise rates and rein in inflation

The wage data highlights that inflation is taking a substantial bite out of incomes in Japan, despite sharp salary hikes

The BOJ has long stated that a "virtuous cycle" where higher salaries fuel growth in prices was needed for it to raise rates, but an economic slowdown appears to be constraining the bank's ability to tighten policy

The path forwardShould the BOJ raise rates to curb inflation, or should it continue to hold rates steady to support growth in the Japanese economy in a time of tariff uncertainty

Analysts have mixed views on the BOJ's path forward

Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, told CNBC that while's May's decline is "largely temporary," real wages are struggling to grow overall, which could dampen economic expansion as consumption slows

However, he said this slowdown in real wage growth suggests that the strength of the BOJ's "virtuous cycle" is not as robust as expected, and could be a factor in delaying rate hikes

In contrast, Jesper Koll, expert director at Tokyo-based financial services firm Monex Group said inflation rising faster than wages will strengthen BOJ Governor Kazuo Ueda's commitment to hike Japan's policy rate, which will almost immediately boost purchasing power for the man on the street by way of a stronger yen

This is because one-third of the Japan's consumer price index is directly linked to import prices, he said, and a stronger yen will reduce imported inflation

Vishnu Varathan, managing director at Mizuho Securities puts it simply: "The optimal game-plan for the BOJ may be to do nothing

Sitting on its hands to affirm the tightening bias (albeit much further out) as it rides out tariffs uncertainties

Varathan said that the BOJ ought to arguably step back, and not step in: the BOJ bably has no scope for further hikes, due to fears of crimping domestic demand

Governor Ueda last month expressed confidence that Japan's economy would be able to withstand the downward pressure from U

Tariffs, adding that the cycle of rising wages and prices will not be interrupted.