By Max Sato
(MaceNews) – Bank of Japan policymakers are expected to maintain the current easing stance for now as they are likely to refrain from raising interest rates at least until April, when they may be able to see a clearer sign that wages will continue rising substantially in the next fiscal year.
In a prelude to annual wage negotiations that take place in early 2024, union leaders are calling for wages to rise by at least 5% (3% in base wage increase) and the government plans to give a special tax deduction to firms raising wages by 7% or more.
But the results of the talks between major firms and their trade unions won’t be available until mid-March and indications of how that will influence smaller businesses, which employ about 70% of the workforce, are likely to emerge after the April 1 start of fiscal 2024.
When the BOJ board decides on a major policy shift, it is likely to come with its latest medium-term growth and inflation outlook as well as its risk analysis in the quarterly Outlook Report issued along with policy decisions at board meetings in January, April, July and October.
Kazuo Momma, executive economist at Mizuho Research and Technologies, told Mace News that his standard scenario is that the board will make a careful decision to end the negative interest rate policy at its April 25-26 meeting.
“But I also think there is a relatively high possibility that such a decision will be delayed,” said Momma, who was assistant governor at the BOJ from March 2013 until May 2016. Previously, he was the director-general of the Monetary Affairs Department and the chief economist at the bank.
Momma said the BOJ would have to confirm three key points before raising rates in April: Whether wage hikes will be sufficiently large, whether service prices will continue rising in tandem with higher wages, and whether there are minimal concerns about global and domestic economies.
“Even if they can become confident about the first point after the labor talks, they may not be able to observe a sufficient rise in service prices or they may face an elevated risk of the U.S. economy slipping into recession and/or continued weakness in domestic consumer spending, then it will be hard for them to lift (the negative interest rate policy),” he said.
Japan’s real household spending posted its eighth straight drop on the year in October, down 2.5%, after a 2.8% dip in September, as high costs for daily necessities prompted many to remain frugal and the lingering heat wave dampened demand for autumn clothing and heaters. The widespread move among consumers to switch to discount mobile phone plans continues while the pandemic-era necessity to simplify weddings and funerals continues to push down the costs for ceremonies, which was the largest contributor to weak spending in October.
On the month, expenditures dipped just 0.1%, after edging up 0.3% in September and rebounding 3.9% in August. Pent-up demand for eating out and traveling had already shown slower momentum in the previous month.
Momma questions the notion that excess savings are supporting pent-up demand, although household savings have risen about Y50 trillion during the pandemic.
“Inflation not only reduces the flow of income but it also wipes out the value of the cumulative stock of financial assets,” he explains. “If you look at real cash holdings and savings, adjusted for inflation, excess savings are already gone. Inflation has snatched ‘Covid savings’ before you could spend them.”
Nominal wages posted their 22nd straight year-on-year rise, up 1.5% in October, but in real terms, average wages fell 2.3% for the 19th consecutive drop.
The Cabinet Office’s latest estimate shows that Japan’s output gap slipped back into negative territory in the third quarter after turning slightly positive in the second quarter and previously staying negative for three and a half years.
The July-September GDP data showed that the economy contracted for the first time in four quarters, down 0.7% on quarter or an annualized 2.9%, as private inventories plunged, net exports slipped after a sharp rebound in April-June, public works spending slowed, pent-up demand for eating out and traveling waned and firms turned cautious about capital investment.
At its next meeting on Dec. 18-19, the nine-member BOJ board is expected to decide to retain its guidance that it 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.” To this effect, it is likely to keep the targets of minus 0.1% for the short-term policy rate and “around zero percent” for the 10-year bond yield, the latter of which was adjusted in October to allow an upward swing to around 1.0% in light of higher yields in the U.S. market.
In its quarterly Outlook Report for October, the BOJ board revised up its core CPI (excluding fresh food) forecast for fiscal 2023 ending next March further to 2.8% from 2.5% forecast in July, and jacked up its projection for fiscal 2024 to 2.8% from 1.9%. The board’s median forecast for fiscal 2025 is 1.7%, revised up slightly from 1.6%, but that would be still below its 2% inflation target as the pass-through impact of high import costs is set to wane.
Since the long end of the yield curve control framework has been made more “flexible” twice in three months this year (some took as a gradual step toward phasing out the yield curve control framework), the market focus is on when the central bank will end its negative interest rate policy introduced in January 2016.
The BOJ charges 0.1% interest on a part of cash reserves parked at the bank by financial institutions, which is designed to encourage banks to lend more, but it is unpopular among lenders as it squeezes their profit margins.
In a knee jerk reaction to remarks by Governor Kazuo Ueda in his parliamentary testimony, financial markets priced in an imminent rate hike in December or January, prompting yen buying last week. The dollar dipped below Y142 from above Y147 before recovering some ground.
In response to a question on his general policy stance, Ueda told a meeting of the upper house committee on financial affairs on Dec. 7 that the bank will conduct “appropriate policy” and ensure tight information control to avoid a leak to news media during the blackout period before each policy meeting, as his “challenging” job is set to “become even more challenging from yearend to next year.”
The governor had used the word “challenging” during his confirmation hearing in February to describe the position for which he was nominated, and this time, too, he simply used the same expression in the context of how demanding and rewarding it is to steer a central bank amid high uncertainty over the global and domestic economies.
Market participants seem to have taken the word “challenging” out of context and assumed that the BOJ’s policymakers would have to make a difficult decision on whether to raise interest rates at their upcoming meeting, on Dec. 18-19 or Jan. 22-23.
Ueda told the committee in his semi-annual report that it is not yet time to shift the bank’s policy stance toward tightening.
“The Bank considers that sustainable and stable achievement of the price stability target is not yet envisaged with sufficient certainty at this point, and that it is important to closely monitor whether a virtuous cycle between wages and prices will intensify,” he read from his prepared statement.
“In this situation, it will patiently continue with monetary easing under Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to support Japan’s economic activity and thereby facilitate a favorable environment for wage increases.”
Asked about an eventual exit from the decade-old large-scale monetary easing, Ueda said the BOJ has not decided as to what it should use as the new policy interest rate when it raises rates: the interest on excess reserve balances or the overnight call rate.
“If this is done properly, there would be a sufficient possibility of achieving a positive outcome from the exit, since a wide range of households and firms would benefit from the virtuous cycle between wages and prices,” he said.
Later he told reporters that it would be better to decide in what order the bank should unwind its large-scale easing tools at the time of an actual exit, instead of planning the specifics now.
Some market participants thought Himino was using his speech to set the stage for an early exit from monetary easing but the deputy governor spent most of his time discussing in the speech the importance of supporting the process of firms reflecting higher import costs in sales prices, raising wages to match inflation, passing high labor costs on to customers and allowing firms’ pricing behavior to
become “more diverse,” in which they can offer attractive goods and services at appropriate prices, instead of just selling good products at low prices.
In his speech, Himino also said the BOJ faces multiple needs: addressing the current inflation, supporting the moderate economic recovery, facilitating a favorable environment for wage increases, and preventing the economy from reverting to a deflationary state.
“The Bank is struggling to find a solution and this is by no means an easy task,” he said. Achieving stable 2% inflation that comes with wage hikes would “require walking a fine line in which inflation decreases, but not too far.”
Momma said the deputy governor’s speech can be interpreted as setting the stage for a rate hike “in a broad sense” but that “it does not necessarily mean it is strongly suggesting the lifting of the negative interest rate in December or January.”