TOKYO (Reuters) -A panel at the Japanese labour ministry has decided to raise the national average minimum wage by about 5% to 1,054 yen ($6.85) per hour this fiscal year, the biggest ever jump, public broadcaster NHK reported on Wednesday.

Achievement of sustainable inflation and strong wage growth are seen as prerequisites for the Bank of Japan (BOJ) to raise interest rates from current near-zero levels.

Raising the legally binding minimum wage would boost households' purchasing power, but squeeze profits at small firms that struggle to make ends meet.

Following the decision, labour and business representatives would meet in August to set pay hikes, taking the situation in each of prefecture into account.

The new minimum pay would be implemented by each prefecture from October.

The government has set a new target of bringing minimum wages to 1,500 yen by the mid-2030s.

In response to rising living costs and labour shortages, major Japanese companies have offered pay rises of 5.1% this year, the biggest in more than three decades.

($1 = 153.9500 yen)