MNI INSIGHT: BOJ Hopes Higher '17 CPI To Boost '18 Wage Hikes

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials are hoping that the rise in the

headline consumer price index this year will result in higher wage increases

during the new wage round next year, MNI understands.

     In Japan, companies have been setting base wage hikes based on the most

recent inflation rate, not the inflation outlook. Labor unions, too, have been

demanding pay increases based on the previous year's consumer price gain.

     A faster pace of wage increase is the key to making businesses and

households believe that prices will rise steadily every year toward the central

bank's elusive inflation goal of 2%.

     The recent gradual rise in labor productivity and consumer prices in

addition to record high corporate profits should prompt at least some major

firms to give higher base wage hikes than last year, BOJ officials argue.

     The BOJ's theory is that when labor productivity rises, real wages tend to

rise with a lag as companies face the limit of their ability to deal with

tighter labor supply by making their operations more efficient.

     --HIGHER INFLATION FOR HIGHER WAGES

     Total wages including regular pay and bonuses rose 1.98% on year in fiscal

2017, with the pace increase slowing slightly from 2.00% in the previous year.

     Base wages rose just 0.48% in 2017, compared to 0.31% in 2016, according to

data from the Japanese Trade Union Confederation (Rengo), the national umbrella

organization for labor unions.

     The wage hikes in April 2017 were based on weak consumer prices in calendar

2016. Last year, the total consumer price index on average fell 0.1% from a year

before. By contrast, total CPI has risen 0.41% on average in the first 10 months

of this year and could accelerate further in the final two months.

     Rengo is demanding an average total wage increase of around 4%, including

automatic seniority increases, in the wage negotiations with management that

begin early next year. This follows the government's call for an average 3% pay

hike next year.

     --INCOME GAINS VS. LACKLUSTER SPENDING

     In theory, higher income supports higher consumer spending but many

households remain cautious in their buying habits amid concerns about the

sustainability of government social security and future salary levels.

     BOJ economists don't expect consumption to rise sharply in the period ahead

because of the nation's low potential growth below 1% and the decline in the

working population. But they expect a rise in income to boost consumer spending

somewhat.

     The BOJ's supply-side Consumption Activity Index posted only a small

rebound in October, up a real 0.3% on the month on a seasonally adjusted basis.

It was the first rise since July, after falling 0.1% in September and dropping

0.7% in August.

     The level of the October index at 107.7 was unchanged with a slightly

negative bias from the average index for the previous three months.

     BOJ officials believe the slow start to the final quarter of 2017 was

caused mainly by a temporary factor in the auto industry. New car sales fell

following suspension of production and shipments by Nissan Motor resulting from

its below-standard vehicle inspection scandal.

     They are focused on whether the underlying trend of private consumption

excluding temporary fluctuations will remain resilient.

     --WATCHING FY18 RETAIL PRICES

     As consumers remain cautious, BOJ economists will also monitor whether

firms are raising prices at the start of the fiscal year in April after having

absorbed higher labor and materials costs for much of this year.

     Hit by serious labor shortage, some transportation companies and restaurant

chains have already raised prices, but companies are generally wary of marking

up prices for fear of losing market share.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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