The Bank of Japan said wage hikes were broadening across the economy due to tight labour market conditions, signalling its confidence the country was making progress toward durably achieving its 2% inflation target.
The optimistic assessment, made at the BOJ's quarterly meeting of regional branch managers on Monday, may heighten the case for the central bank to raise interest rates as soon as its next meeting on July 30-31.
Separate data showed Japanese workers saw their average base pay climb 2.5% in May, the fastest pace in 31 years, suggesting that broadening wage gains will give households more purchasing power and underpin consumption.
"Many regions reported that big firms' big pay hikes in this year's wage negotiations were spreading to small and medium-sized companies," the BOJ said in a summary of discussions at the branch managers' meeting.
The assessment compared with that of the previous meeting in April, when the BOJ said there were "hopeful signs" solid wage increases among big companies would spread to smaller firms.
Some regional smaller firms decided to prioritise raising pay to retain or hire workers, even if they were not earning sufficient profits, the BOJ summary said, a sign of how Japan's shrinking working-age population is intensifying a chronic labour shortage.
Many regions also saw companies passing on rising costs, or considering doing so, particularly those in the services industry, the BOJ said in the summary.
"We're seeing wages rise not just among big firms but smaller ones," said Kazushige Kamiyama, the BOJ's Osaka branch manager who oversees the Kansai western Japan region.
"For firms, higher wages mean higher costs. Some of them are starting to pass on the cost by raising service prices," he told a news conference.
The central bank's view on wage developments will be among key factors its board will scrutinise at this month's policy meeting in setting interest rates as well as fresh quarterly growth and inflation projections.
BOJ Governor Kazuo Ueda has said wage hikes need to trickle down to smaller firms, and companies to begin charging more for services, before the central bank considers raising interest rates from current near-zero levels.
Many market players expect the BOJ to raise rates sometime this year, though they are divided on the timing.
In a sign of the BOJ's optimism on consumption, the regional branch managers said household spending was "firm as a whole."
A government survey released on Monday showed sentiment among service-sector firms, seen as a leading indicator of consumption, perked up in June for the first time in four months.
But the rebound was driven mostly by a surge in inbound tourism, which offset the thrifty spending of domestic households who were feeling the pinch from rising living costs.
"A few branches reported that rising inflation was prodding consumers to seek cheaper goods, particularly at supermarkets," the BOJ's summary said.
Core consumer prices in May rose 2.5% from a year earlier, staying above the BOJ's target for more than two years.
