Bank of Japan balancing wages growth, inflation challenges

September 25, 2023

TOKYO -- Potential termination of the negative interest rate policy by the Bank of Japan (BoJ) has suddenly emerged on investors' radar screens, with BoJ Governor Ueda saying in a recent interview with the Yomiuri newspaper that the possibility of having enough evidence of a sustainable wage increase by the end of this year is not zero.

When such condition is met, the Governor said, the end of the negative rate policy becomes an option.

Commenting on the issue, the global financial services group, Natixis, says a temptation is to think that wages are growing fast in Japan, based on spring wage negotiations among major firms which rose +3.7% in FY2023, the largest increase in 30 years.

"However, nominal regular wages at a macro level, which exclude overtime payments and bonuses, increased only by +1.5% YoY in July," Natixis says. "Because of their low productivity gains, SMEs which generate about 70% of Japan's employment, have not seen much of an increase in wages."

Natixis says wages growth has become increasingly important for the BoJ to meet its 2% inflation target in the medium run. Goods prices have been stabilising as import prices have been declining since April.

"Furthermore, services inflation could peak by early next year, as non-manufacturers complete their pass-through of higher import costs to their customers. For this reason, unless wages increase sustainably, the current inflation episode in Japan will be transitory."

In fact, says Natixis, Governor Ueda reiterated during the same interview that because the sustained achievement of 2% inflation remains distant, the BoJ will patiently maintain monetary policy in an accommodative setting.

"Therefore," says Natixis, "the Governor probably didn't intend to signal a rate hike by the end of this year. Rather, his intention could had been to verbally intervene in the foreign exchange market as the Yen was depreciating rapidly above USDJPY=147.

"Without the confidence of meeting its inflation target, the BoJ is expected to decide on a status quo at its September meeting to ensure that wages increase beyond the base year effect," Natixis adds. "Markets will need to wait patiently for the BoJ to finally move out of negative interest rates."