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April 4, 2023

As Ueda takes the helm of the Bank of Japan, do record wage hikes finally portend “good inflation?”

There are implications for major companies, yield curve control and the central bank’s swollen balance sheet.
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In-house blogger
Guest blogger
Tetsuo Harry Ishihara
Strategist, Macrobond consultant, and former adviser to Japanese regulators
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.

BOJ Governor Kazuo Ueda starts his term on April 9. He takes over from Haruhiko Kuroda, who is credited with helping Japan escape deflation. The core consumer price index was falling by half a percentage point per year when Kuroda’s term began in 2013. Today, core CPI is rising at about 4 percent.

However, Kuroda’s unprecedented policies of QQE (“quantitative and qualitative easing” – huge purchases of bonds, equity ETFs and REITs); YCC (yield curve control, capping the 10-year bond yield at around zero); and NIRP (the negative interest rate policy) are blamed for weakening Japan’s financial system. The BOJ now owns over 50 percent of outstanding government bonds (JGBs). 

Ueda is a leading monetary policy researcher credited with inventing “forward guidance” and providing the logic for zero interest rates and QE (which later became NIRP and QQE). A former policy board member, he is seen as a “wise owl” rather than a dove or hawk. 

Together with Deputy Governor Ryozo Himino, a regulatory and asset-disposal expert, and Deputy Governor Shinichi Uchida, an architect of QQE and the BOJ’s top monetary policy expert, Ueda will focus on improving the functioning of markets while keeping an accommodative stance. 

Their policy of “Sustainable Monetary Easing” hopes to shift “bad,” cost-push inflation, driven by expensive imports, to “good,” demand-pull inflation in the form of rising wages. (I discussed this philosophy in a previous blog post, “The Kuroda Code.”) 

Indeed, the BOJ and Ueda say that due to a lack of stable, sustainable, wage-driven inflation, their official 2 percent inflation target has not been attained – despite that 4 percent pace for core CPI.

In Japan, "bad" cost-push inflation has been driven by more expensive energy and food imports, as our first chart shows. That was in turn aggravated by the weaker yen. The BOJ was blamed for the falling currency, given the widening interest-rate differential with the Federal Reserve.  

Record wage hikes and price hikes for over 5,000 food items are expected in April. Meanwhile, the BOJ’s median forecast for core CPI is only 1.6 percent for FY23.

As Ueda takes the helm of the Bank of Japan, do record wage hikes finally portend “good inflation?”

Shunto wage hikes

Every March, managers of Japan’s biggest companies meet with union representatives; these are known as the “Shunto” spring talks.

The unions’ wage offensive is split into seniority-linked annual raises and base salary hikes, known as base-ups. Despite the name, the former is optional; not everyone gets a raise. But base-ups are across the board, and therefore more important to the BOJ and the government. 

Wage hikes led by base-ups should promote the sought-after “good” inflation. In other nations, disposable income and personal consumption have risen together since 2000.

Amid the highest inflation in 40 years, Prime Minister Fumio Kishida has vowed to improve income distribution in order to achieve a more sustainable society, an ethos he calls “New Capitalism.” Improved wages are a pillar of these efforts and matter of “corporate social responsibility,” he says. 

For almost three decades, wages have been suppressed in Japan – even as retained earnings and cash in corporate Japan rose to record levels, as shown by our next chart, which uses Ministry of Finance figures.

Recent Japanese tax data shows that the average wage is only JPY 4.43 million, or about USD 34,000. Older data from the OECD, which takes purchasing power parity into account, shows a slightly higher average wage of USD 39,700. But as the next chart shows, that measure of Japanese wages remains not only low on a global basis, but only somewhat more than half the average wage in the US:

Uniqlo, Toyota and labour shortages

Fast Retailing, the owner of the Uniqlo clothing brand, recently shocked corporate Japan by announcing a 40 percent wage hike to attract quality personnel. With that news, Japan abruptly woke up to the reality of a labour shortage that is already pushing some smaller companies into bankruptcy.

Major companies subsequently announced their own wage hikes – mostly in the range of 5 to 7 percent, including 2 to 3 percent base-ups for FY23. (For the past 20 years, total hikes hovered around 2%, including base-ups that were usually near zero.) 

In the manufacturing industry, Toyota said it would fully meet labour’s highest demands in 20 years, and some 86 percent of major manufacturers followed suit. According to initial estimates by Rengo, which represents 5,000 major unions, the average FY23 base-up for full-time employees at major companies was 2.33 percent. That’s the highest rate in almost 30 years, as our next chart of government data shows.

Many part-timers will also receive record hikes of 5 to 7 percent. Meanwhile, Prime Minister Kishida is proposing a record hike for the minimum wage, which would rise from JPY 961 to JPY 1,000 an hour. 

Major companies ordered to help their smaller vendors

Japan’s small and medium-sized enterprises (SMEs) are also key, with their staff accounting for about 70 percent of all employees. However, they are not unionised, and their wage hikes are difficult to track. Surveys usually imply that a majority of SMEs oppose wage hikes due to low profits. 

To boost such firms, an important policy was unveiled on March 15, the same day that major unions announced their wage hikes.

The prime minister, the powerful Keidanren business lobby, the small-business lobby Japan Chamber of Commerce, and Rengo jointly announced that major companies should allow smaller vendors to pass on their costs. 

To ensure compliance, surveillance continues to be stepped up. Back in 2021, the government designated March and September as “price pass-through months,” where SMEs were encouraged to pass on their costs. Interviews and surveys measuring abuses of buying power are being used to score large companies on their cooperation. Low scores are being publicised and such companies receive a notice. 

Sustainable monetary easing

An unexpected December tweak to the yield curve control range – which widened from a 0.25 percent band to 0.5 percent – and Ueda’s appointment sparked speculation that Kuroda’s policies would be phased out. 

Indeed, the YCC yield target may be aimed at shorter durations, such as 2- or 5-year bonds. The USD 4 trillion-plus of JGBs, equity ETFs and REITs on the BOJ’s balance sheet (whose growth is shown in the next chart) may be spun off into government funds to avoid disruptions. 

(For the equity ETFs, one novel idea involves having government-related funds issue perpetual bonds to buy them from the BOJ, then dismantling the ETFs to save fees, and using the dividends to pay interest on the bonds.)

Finally, NIRP will probably be left alone as its scope has already been limited - meaning Japan will probably remain the last nation to have a negative interest rate policy.

So has “good” inflation finally arrived? According to one BOJ policy board member, reasons to be optimistic include 1) the coming of age of a younger generation that has less experience with deflation; 2) this year’s record Shunto wage hikes, which “broke the dam”; and 3) productivity boosts from digital and green innovations. 

Prospects for Ueda’s “sustainable monetary easing” are starting to look interesting.

This article was published in conjunction with Japan Exchange Group (JPX) and the original can be found here.

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