MNI POLICY: Solid Wage Data Needed Before BOJ April Exit Talk

The Bank of Japan will likely not obtain sufficient data on wage increases, particularly at smaller firms, needed to alter its easy policy settings before April, making an earlier adjustment unlikely, MNI understands.

BOJ officials will formulate a rough idea on wages, including smaller firms, when the government releases its wages survey due mid-March, but they are preparing the market now for an easy policy exit in April should the data show a strengthening virtuous wage-price cycle.

While the BOJ board may revise its median forecast for core-core CPI in fiscal 2025 to 2.0% from October’s 1.9% at the January meeting, a revision will not trigger policy change. The board will instead prefer to wait on its first core-core CPI forecasts for fiscal 2026 published within the April Outlook Report before adjusting its policy settings.

The board will use core-core CPI to measure whether price rises have become stable and sustainable and justify policy change, including the removal of negative interest rates and yield curve control. Should an April change occur, the BOJ will continue with its Japanese government bond purchase programme to curb a sharp rise in bond yields.

Former BOJ Executive Director Kenzo Yamamoto told MNI this month the bank would want to see real wage growth ahead of policy change. (See MNI INTERVIEW: BOJ Needs Signs Of Real Wages Growth -Yamamoto)

PAVING THE WAY

Bank officials are gathering economic data and anecdotal information to support the BOJ’s baseline view and stand ready to increase communication with market players over the coming months.

The BOJ will conduct a survey of 2,000-2,500 non-financial firms between November and February 2024 on the effects of Japan’s easy policy from the 1990s onwards to help support policy change and illustrate how higher long-term rates will not impact economic activity, which is more sensitive to short- and medium-term interest rates. A small rise in the overnight call loan rate after the removal of negative interest rates will not increase the financial burden at firms and households, BOJ officials believe.

The bank will scrutinise whether inflationary pressure associated with the interaction between wages and prices – the so called second force – remains stable after it has largely strengthened in line with the BOJ’s forecasts.

Bank officials will also focus on wage negotiations led by a labour organisation that represents retail, restaurant, textile and other industry unions, which has called for a 6% pay increase target next spring. Representatives from UA Zensen, which represents about 2,200 unions with 1.85 million members, will finalise their 2024 negotiations and demands by January.

MNI reported recently BOJ officials were concerned some firms could opt for one-off bonus payments next year over increased base pay, jeopardising the wage-price cycle. (See MNI POLICY: BOJ Wary Over Outlook For Pay Rises)