–Members Agree BOJ Needs to Maintain Easing to Support Positive Wages-to-Prices Cycle
–A Few Members Warn Against Being Complacent about Upside Risks to Inflation
By Max Sato
Policymakers agreed that they must maintain their easing stance “patiently” to support economic activity and structural reform toward a sustainable wage increase and stable inflation around 2%.
Given that higher import costs have fed through to a virtuous cycle between wages and prices and society is shifting toward wage hikes, one member said, “it is highly possible that the wage growth to be agreed in next year’s wage negotiations will exceed that agreed this year.”
“It seems that achievement of the price stability target is coming in sight, and the second half of fiscal 2023 is an important period for finally determining whether the target will be achieved,” the member said.
“Sustainable and stable achievement of the price stability target is not yet envisaged with sufficient certainty at this point, and thus the Bank needs to patiently continue with monetary easing under yield curve control,” one member argued, echoing repeated remarks by Governor Kazuo Ueda.
Another member agreed: “To achieve the 2 percent target through the virtuous cycle between wages and prices, the growth momentum in nominal wages needs to strengthen further. It is thus important for the Bank to support the momentum in wage hikes through continuation of monetary easing.”
Not Behind the Curve Without a Rate Hike Now
A third member also said the bank should not be in a hurry to change policy.
“Given that the wage growth rate has not caught up with the inflation rate to date, even if next spring’s wage hikes are considerably higher than expected, the risk that this will cause underlying inflation to significantly exceed 2 percent is small,” the member said. “The Bank is currently not in a situation where it would fall behind the curve if it did not rush to raise policy interest rates. It would not be too late even if the Bank makes a decision after it sees developments in labor-management wage negotiations next spring.”
Clearer signs of substantial wage hikes in fiscal 2024 starting in April may emerge from the results of annual wage talks between major firms and their trade unions that usually come out in mid-March. Policymakers may have to wait until later to confirm whether smaller firms, which employ about 70% of the workforce, can afford to follow the lead of large corporations.
The results of annual labor talks released in April showed that Japanese workers at large firms were expected to receive an average 3.80% increase in total wages, a 30-year high, in fiscal 2023, up from 2.14% in the initial estimate for fiscal 2022. But excluding seniority-based rises that are already in contracts, the preliminary estimate for the average base wage hike is lower at 2.33%, which is still up from 0.50% seen a year earlier.
Total monthly average cash earnings per regular employee in Japan posted their 22nd straight year-on-year rise, up 1.5% in October, but after adjusting for inflation, real average wages fell 2.3% in October for the 19th consecutive drop.
“Increasing the flexibility in the conduct of yield curve control at the previous MPM (in October) has lowered the likelihood of distortions on the yield curve,” one member said. “Therefore, unless underlying inflation strengthens to an excessive degree, the Bank will have sufficient leeway to determine whether the 2 percent target will be achieved through a virtuous cycle between wages and prices.”
Some Warn Against Missing Timing for Normalization
At the same time, some members warned against being complacent about upside risks to inflation.
“While the risk of prices becoming excessively higher than expected and the Bank needing to rapidly tighten monetary policy is small, the cost incurred if this risk materializes would be significant,” one member said.
“With the likelihood of achieving the price stability target of 2 percent in a sustainable and stable manner rising further, the timing of normalization of monetary policy is getting closer,” Another member observed. “While it is undesirable to make hasty decisions, it is ‘better to be rough and ready than slow
and elaborate,’ as the saying goes.”
“To avoid the risk of high prices damaging the underlying trend in consumption and undermining the achievement of the price stability target, the Bank should not miss an opportunity in normalizing monetary policy,” the member said.
No Change in Policy, Guidance at December Meeting
At the December meeting, the nine-member board voted unanimously to maintain its basic monetary easing stance under the seven-year-old yield curve control framework backed by large asset purchases, keeping its long-term interest rate target officially “around zero percent,” with an actual upper limit around 1%, and the target for the overnight rate at minus 0.1%, in a decade-long campaign to achieve stable 2% inflation. The board also retained its guidance that it will “patiently continue with monetary easing” in order to “achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases.”
Governor Ueda told a post-meeting news conference last week that he believed the certainty of the board’s outlook that the underlying inflation rate will increase gradually toward achieving the price stability through fiscal 2025 “continues to rise gradually” but also said the board “still needs to closely monitor whether a virtuous cycle between wages and prices will intensify.”
The board will watch corporate pricing behavior and various price indexes, particularly service costs, through both economic data and interviews with firms, Ueda said.
Asked if the BOJ should start raising rates by ending its negative short-term interest rate policy before the US Federal Reserve begins cutting rates to avoid a sharp appreciation of the yen, the governor replied, “I think it would be inappropriate to consider changing our policy in a hurry on expectations that the Fed is likely to move in three to six months, for example. I don’t think that way.”
On ways to communicate the bank’s policy intentions toward raising interest rates, Ueda said the board will provide existing and any new information as to how it analyzes data but that it is unlikely to predict when it plans to change policy. Asked about expectations among some market participants about a rate hike in January, he said there is not much new economic data available before the Jan. 22-23 meeting.