A panel at the Japanese labor ministry has decided to raise the national average minimum wage by about 5% to 1,054 yen ($6.85) per hour for this fiscal year, marking the largest increase ever, public broadcaster NHK reported on Wednesday.

Achieving sustainable inflation and strong wage growth are considered essential for the Bank of Japan (BOJ) to raise interest rates from their current near-zero levels. Raising the legally binding minimum wage would enhance households' purchasing power but could also reduce profits for small firms struggling to survive.

Following this decision, labor and business representatives will meet in August to negotiate pay hikes, taking into account the specific conditions of each prefecture. Each prefecture will implement the new minimum wage starting in October.

The government has set a new target to bring minimum wages to 1,500 yen by the mid-2030s. In response to rising living costs and labor shortages, major Japanese companies have offered pay rises of 5.1% this year, the largest increase in more than three decades.