Japan’s wage boom paves the way for BOJ exit, boosts inflation battle

Japan is gearing up for a second consecutive year of significant wage hikes, presenting an opportunity for the Bank of Japan (BOJ) to consider stepping back from a decade-long monetary stimulus. The substantial pay increases witnessed this year, the largest in over 30 years, are expected to continue into 2024.

According to Reuters, the move is seen as a pivotal shift away from deflation, with major companies such as Suntory Holdings, Meiji Yasuda Life Insurance, and Bic Camera announcing plans for substantial pay bumps. Takeshi Niinami, CEO of Suntory Holdings, sees this as a paradigm shift, stating, “What’s going on is a big paradigm shift away from deflation and towards inflation.”

The consistent pressure from Prime Minister Fumio Kishida on companies to increase pay and offset the impact of rising living costs is a driving force behind this trend. The back-to-back annual wage increases align with Kishida’s efforts to ensure robust pay hikes and prevent economic stagnation.

With inflation surpassing the BOJ’s 2 per cent target for over a year, companies are under unprecedented pressure to sustain wage growth. Rengo, Japan’s largest trade union confederation, demands further pay hikes, with plans to ask for “5 per cent or higher” in the upcoming negotiations. UA Zensen, another major union, is set to demand a 6 per cent rise.

Analysts and economists foresee sustained wage growth in 2024, exceeding the levels witnessed this year. Atsushi Takeda, Chief Economist at Itochu Economic Research Institute, notes that a combination of inflation, a tight labour market, and healthy corporate profits will contribute to maintaining momentum for wage hikes. The ability of companies to pass on higher costs in their supply chains further supports this trend. However, the key challenge remains ensuring that wage increases extend to smaller firms and regional areas, as highlighted by a BOJ report in October.

The potential continuation of robust wage growth offers Prime Minister Kishida a tool to navigate economic challenges and rebuild public support. Kishida’s measures include subsidies and tax incentives for companies implementing significant pay hikes, benefiting even loss-making small and medium-sized enterprises (SMEs).

These strategies aim to empower SMEs in negotiations and stimulate broader wage growth. Kishida’s call for the business community to surpass this year’s wage growth in 2024 reflects the urgency and commitment to this economic agenda.

For the Bank of Japan, sustained wage growth becomes a crucial factor in considering an exit from its controversial monetary stimulus. Market speculation suggests the BOJ could end negative interest rates around April, pending further clarity on wages. Clues may emerge from the BOJ’s quarterly tankan business survey in December and wage talks between major business lobbies and unions in January. However, the ultimate test lies in whether wage hikes extend beyond major corporations to smaller firms and regional economies, ensuring a comprehensive and inclusive economic recovery.

(With inputs from Reuters)

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