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January 26, 2024

The BOJ is dropping hints that Japan’s “lift-off” from NIRP is likely just months away

Japan’s inflation revolution continues.
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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.
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Keith Campbell

The Bank of Japan left policy on hold at its January 23 meeting, but one of the central bank’s comments hinted that it feels more confident about hitting a long-awaited core inflation target. Meanwhile, the governor indicated that Japan is exiting its deflationary period at long last. 

Markets are focusing on the BOJ’s thoughts on 1) wage growth, 2) inflation and 3) monetary policy. 

Wage growth

Governor Ueda and other officials have consistently pointed to wage growth as being crucial for upcoming monetary policy decisions. As the first graph shows, 2023’s wage growth was the highest in about 30 years, and 2024 may come in even higher, with some companies announcing 7 percent hikes. 

This year’s negotiations officially kicked off on January 24 with an annual labour-management forum led by Keidanren, Japan’s largest business lobby. Its big-business members are being told to use their record profits to hike wages as a “social responsibility.” 

Another tailwind is the extreme labour shortage spreading across Japan. Rengo, the organisation representing about 5,000 unions, wants wages to rise “at least 5 percent,” versus last year’s call for “about 5 percent.”

Although the Bank of Japan has been conducting its own surveys, it is believed it will wait for at least Rengo’s own initial release in mid-March.

But when exactly will monetary policy change? A late March “lift-off” from negative rates might rattle balance sheets at the banks, which wrap up their fiscal year on March 31. Also, the BOJ would probably want to make a change before the Federal Reserve’s widely expected rate cuts begin this year, aiming to avoid rattling the yen. That leaves April as the earliest possible month for lift-off. 

At the January 23 press conference, Ueda continued to hint that upcoming wage data – including for small and medium-sized enterprises - will be key. 


Japan’s highest inflation in 40 years (excluding subsidy effects) was initially driven by higher import prices of energy and food in the wake of the pandemic and the war in Ukraine. Ueda refers to this import inflation as the “first force.” Since early last year, however, energy subsidies and the stronger yen have tamed goods inflation, as the next graph shows. 

On the other hand, as the arrow shows, services inflation is on the rise; it has attained 2 percent – the highest level in at least 30 years, excluding tax effects. Ueda refers to this as the “second force” among inflation movers. 

The BOJ actually welcomes this phenomenon as evidence of wage growth, and more growth is expected. On Jan 22, the Service Rengo, a federation of 200 service unions, announced it will demand a record-breaking 3 percent hike in base salaries for 2024, versus last year’s ask for “at least 1 percent.”

At the January 23 press conference, Ueda acknowledged progress towards the 2 percent core inflation target, especially in services, but insisted it has not been achieved. This was confirmed in the Outlook Report’s median view of just 1.8 percent for FY25. 

However, the report also had a new line that read: “the likelihood of realising this outlook has continued to gradually rise…”

Monetary policy

April will also coincide with the next quarterly Outlook Report and its inflation forecasts, which could be used to justify a lift-off. The BOJ’s first rate hike in 17 years would also symbolise Japan’s exit from deflation – a goal of the Kishida administration.

With Ueda keeping all options open for now, what about the other forms of quantitative and qualitative easing (QQE)? As the next two graphs imply, yield curve control (YCC) is seen to be near-defunct at the moment, with yields well below the effective cap of 1 percent. 

Similarly, equity ETF purchases have been tapered since early 2021, and Ueda recently hinted to lawmakers that they may no longer be needed. The reduced BOJ market presence is generally welcomed.

BOJ’s wage-price spiral ambitions

At home and abroad, the BOJ has been criticized for being “behind the curve” in tackling inflation. Real wage growth has been negative for about 20 months, and food inflation (including supermarket “shrinkflation”) has been painful.

Of course, the central bank’s caution comes from the preceding 30-year struggle against deflation. During that time, corporates that hiked prices were punished, while those that cut prices were not rewarded.

But it seems that the “zero-inflation norm” is breaking. Tankan surveys in the next graph show that more companies are hiking prices; the level of “net hikers” is at levels unseen since the 80’s. 

Recently, a CEO in the food industry declared that his company and others should “no longer apologise” for hiking prices, as “price and wage hikes go hand in hand.” Meanwhile, political support for a wage-price spiral continues to be strong, with Prime Minister Kishida reportedly saying that “an exit from deflation will be huge.” Government agencies are supporting the spiral by issuing notices to companies unwilling to accept higher costs from their vendors, encouraging them to pass on labour costs.

Ueda’s Christmas speech

Finally, we examine Governor Ueda’s {{nofollow}}December 25 speech to Keidanren. It was more interesting than the January meeting, especially when he clearly stated that Japan’s exit from deflation looks likely: 

“I expect that this time around, Japan's economy will get out of the low-inflation environment and achieve a virtuous cycle between wages and prices.” 

He then cautioned: “In the past, there were times when moves to raise prices did not become widespread.” 

So, what is different this time? His rationale seemed to indicate that the answer is the current combination of record corporate profits, a severe labour shortage, and less deflation imported from abroad. 

Japan’s inflation revolution continues. 

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

Related posts from this author:

Japan’s wage obsession (available here or here)

Japan’s inflation revolution (available here or here)

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