By Max Sato
(MaceNews) – The Bank of Japan board is widely expected to retain its guidance in a unanimous vote at its Jan. 22-23 meeting that the bank will “patiently continue with monetary easing” in order to “achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
This means the bank is likely to maintain the yield curve control framework for now, possibly until April or a little later, keeping the targets of minus 0.1% for the short-term policy rate and “around zero%” for the 10-year bond yield, the latter of which has a flexible upper limit of 1%.
Market expectations for a policy change in January or March have receded quickly in light of the magnitude 7.6 earthquake on Jan. 1 that killed more than 230 people and caused damage to nearly 29,000 homes in Ishikawa Prefecture along the Japan sea coast, leaving over 15,000 people still in evacuation.
In a survey by the corporate research firm Teikoku Databank conducted from Jan. 12 to 17 and released Friday, 13.3% of the 1,238 respondents said the earthquake had already adversely impacted their business or was expected to cause a supply disruption or a sales decline. In the northwestern Japanese region of Hokuriku that includes Ishikawa, 43.2% of the respondents said they had been or expected to be affected by the disaster.
Official remarks have also led to the conviction among market participants that the BOJ board will take a cautious approach to confirming the emergence of a positive cycle between wage hikes and gradual inflation.
In his first interview with news media since he took office last April, Governor Kazuo Ueda told the public television network NHK late last month that the possibility of lifting the negative interest rate in 2024, which would be the bank’s first interest rate hike since 2007, “is not zero.” Ueda said he wants to confirm two key factors before the board considers shifting the bank’s policy stance.
The first one is “clear” wage growth for the upcoming fiscal year that starts on April 1 that should be at or above the pace of increase set for fiscal 2023 through annual labor talks: an average 3.58% increase in total wages, which is a 30-year high (excluding seniority-based rises that are already in contracts, the average base wage hike is lower at 2.12%).
But Ueda warned that he would not link the bank’s policy decision to certain events or data, such as the results of annual wage talks between major firms and their trade unions that usually become available in mid-March. The board’s judgement should reflect a broad range of macro-economic indicators and anecdotal evidence, he said.
Second, Ueda wants to ensure a continued increase in service prices that reflects the move among many firms to pass higher labor costs onto customers. The pace of year-on-year increase in service prices has already exceeded that in goods prices in CPI data as suppliers have raised sales prices in stages to cover high import costs.
Policymakers may have to wait until later than mid-March to confirm whether smaller firms, which employ about 70% of the workforce, can afford to follow the lead of large corporations. The final tally of wage hikes at firms in all sizes for fiscal 2023 was released in early July by the Japanese Trade Union Confederation.
Asked about this timing, Ueda told NHK that BOJ officials may not have to wait until “complete” information about wage hikes at smaller firms becomes available.
“If we can see other indicators on small- and medium-sized companies, such as they have good earnings, or macro-economic data, such as consumption, investment and total demand are in good conditions and likely to produce a virtuous circle, I think we should be able to make a judgement beforehand,” he said.
The summary of the BOJ’s Dec. 18-19 meeting showed board members argued that they should wait until next spring (from March to May) to confirm whether annual labor talks would lead to a substantial wage hike for the second fiscal year in a row before considering lifting the negative short-term interest rate target or ending the yield curve control framework.
Governor Ueda told a post-meeting news conference on Dec. 19 that he believed the certainty of the board’s outlook that the underlying inflation rate would 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.” Not much new information was likely to emerge before the January meeting, he added.
Data released last week showed that total monthly average cash earnings per regular employee in Japan posted their 23rd straight year-on-year rise, up 0.2% in November after a 1.5% rise in October, while real average wages fell 3.0% in for the 20th consecutive drop. The unusually low total wage growth may be revised up later this month.
BOJ branch managers who gathered in Tokyo for a quarterly meeting on Jan. 11 reported that economic conditions in most of the nine Japanese regions were “picking up,” “recovering gradually” or “recovering steadily.” Only one region said its pickup was slowing in the face of sluggish exports.
In the branch managers’ report, many firms said they would have to raise wages again in fiscal 2024 to secure workers but some were cautious about doing as high costs are squeezing their profit margins and there is uncertainty over China’s economic recovery.