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January 22, 2023

The Kuroda Code: no virtuous wage-price spiral in Japan

Bank of Japan Governor Kuroda wants a “virtuous wage-price spiral” to push inflation to his target.
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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.

Japan’s consumer price index (CPI) is spiking, reaching the highest since the 1980s. But Bank of Japan Governor Haruhiko Kuroda continues to oversee one of the most accommodative stances among the world’s central banks. 

He has so far continued to deny that his 2 percent inflation target has been attained on a "stable and sustainable basis, supported by wage hikes." 

This is important as the nation approaches the “Shunto” wage negotiations. Every March, managers of Japan’s biggest companies meet with union representatives; in recent years, the unions have had to accept wage increases below their target.

Governor Kuroda insists that the current run-up in inflation is goods-driven, led by rising prices for commodity imports. Headline goods inflation is 7 percent, but that pace is expected to ease by about September, with less pressure from expensive oil imports. 

By contrast, headline services inflation has indeed remained low, staying below 1 percent. 

The chart below illustrates three decades of union wage negotiations for across-the-board base salary hikes, known as "base-up," graphed against inflation. 

Base-up increases have stubbornly remained at about 0.5 percent in recent years, despite demands of 2 percent from Rengo, the top union organisation in Japan. Apparently, wage pressures are being absorbed by the post-Abenomics surge in labour force participation by women and senior citizens. 

This spring, Rengo, which represents 5,000 unions, will request a 3 percent “base-up” (base salary hike) for fiscal 2023. Corporate Japan has denounced this demand as being out of line, and the economist consensus is for a base-up of 1.08%. 

With goods inflation expected to slow, services inflation remaining low, and a large base-up increase from the Shunto talks looking unlikely, the "virtuous wage-price spiral" Governor Kuroda is waiting for may remain out of reach.

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