By Max Sato
(MaceNews) – The Bank of Japan’s nine-member board is expected to decide in a majority vote at its March 18-19 meeting to end its seven-year-old yield curve control framework and lift the minus 0.1% short-term rate target to a range of zero to 0.1%, which would be the bank’s first rate increase since 2007.
The latest outlook is based on news that wage hikes for fiscal 2024 that begins next month are set to well surpass the pace of increase seen in the previous year.
The first estimate by the Japanese Trade Union Confederation (Rengo) released Friday showed that the median wage hike at its 771 member firms is 5.28%, a 33-year high, accelerating from its initial estimate of 3.80% seen a year earlier, which was later revised down to 3.58%.
Base wages, key to sustainable household income growth, are also set to rise at a high pace of 3.70% (data available at 654 firms), up from 2.33% estimated a year ago. The median wage hike among smaller firms, 358 of 771, is 4.42%, up from 3.45% a year ago and that for base wage increase is 2.98% at 268 firms, up from 2.12%.
Rengo figures tend to be revised down later but Friday’s data is expected to give more confidence to BOJ board members who have been cautious about shifting policy before confirming clearer signs of wage hikes.
Widespread labor shortages have prompted major firms to accept higher wage hikes during their annual talks with unions, which the bank hopes will bring about stable 2% inflation backed by demand instead of higher import costs.
While the pickup in nominal wages continued for just over two years in January, real wages remain depressed for nearly two years, the latest data from the Ministry of Health, Labour and Welfare showed. Total monthly average cash earnings per regular employee in Japan rose 2.0% on year in January, posting the highest growth since 2.3% in June 2023, but in real terms, average wages fell 0.6% as inflation remains above 2%, keeping household spending weak.
The BOJ is expected to end targeting the 10-year bond yield at a certain level, currently “around zero” with a flexible upper limit of 0.1%, as the yield curve control framework has fulfilled its role of suppressing borrowing costs and turning around the stubborn deflationary mindset. The policy tool has been criticized for debilitating the normal pricing function of the bond market.
The BOJ is also expected to revive the uncollateralized overnight interest rate “in a range of zero to 0.1%” as the main policy tool and apply a positive 0.1% interest on excess reserves parked at the bank by financial institutions, which had been in place before it was replaced in April 2013 by quantitative and qualitative monetary easing that initially targeted the sum of cash available for economic activity.
Public remarks by some BOJ board members point to a higher possibility of achieving the bank’s 2% inflation target after nearly 11 years of efforts to reflate the economy through massive cash injections into the financial system and keeping borrowing costs for households and businesses at low levels. They also indicate consensus among board members that the risk of the economy falling back into deflation has been reduced, although the government continues to say Japan needs economic stimulus to move completely out of deflation (it may announce that deflation is officially over in its monthly economic report later this month or next).
At its last meeting on Jan. 22-23, the BOJ board decided unanimously, as expected, to maintain yield curve control and 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.”
For analysis of the BOJ policy, also see our story entitled “Preview: Bank of Japan Edging Closer to Ending Yield Curve Control Framework, Raising Rates amid Reduced Risk of Economy Slipping Back into Deflation” published on March 13.