MNI INSIGHT: BOJ Policy Waits On Small Firm Wage Hikes​

Bank of Japan officials are concerned smaller companies may not be able to lift wages as much as major corporates, potentially undermining the delivery of a "virtuous cycle" of rising wages and prices viewed as key to any shift away from its easing policy, MNI understands.

Policymakers believe major companies passing on higher costs to customers and benefitting from the weaker yen can deliver reasonable wage hikes to relieve workers' cost of living pressures caused by higher food and energy prices. However, they are concerned smaller firms that haven’t fully transferred high costs to prices will have difficulty raising wages as their profits are squeezed, clouding the prospects for broadly stronger wage growth among Japan's workers.

Unless reasonable wages hikes are confirmed in economic data, BOJ officials will have reservations that a price-wage spiral is gaining traction and will not consider any policy adjustments. Policymakers are also wary about the global economic outlook, with a recession viewed as a threat to Japan's prospects for a sustainable economic recovery. (See MNI INTERVIEW: BOJ Policy Shift Would BE A "Miracle" - Kataoka)

The BOJ has been encouraged by the rise in medium- to long-term inflation expectations among companies as revealed in the September Tankan survey. The pass-through of higher costs has been wider than BOJ officials expected in July, creating an environment for smaller firms to raise their retail prices and feed through to upward pressure on measures of inflation.

INFLATION EXPECTATIONS

Rising inflation expectations will test whether the BOJ maintains its forecast for a slowing in the year-on-year rise in CPI in fiscal 2023 as base year effects wane, paving the way for core CPI to fall to a mid-1% level in fiscal 2024. Officials are concerned the expected slowdown in CPI will be reflected in a downward revision of firms' inflation expectations. (See MNI: BOJ Worried About Surge in Oct Tokyo CPI, Hit To Spending)

Corporate inflation expectations will likely continue rising as they track year-on-year gains in consumer prices over coming months, increasing pressure on firms to consider raising wages at a reasonable level. However, one time wage hikes won't be sufficient to alter people's deflationary mindset unless they are confident that wage hikes will be sustained.

The Tankan showed companies expect the annual consumer inflation rate to rise to a record high of 2.6% a year from now, up from 2.4% in June. They also anticipate a record high rise of 2.1% over three years and a record high rise of 2.0% five years ahead, compared with increases of 2.0% and 1.9%, respectively, in the June survey.

The rise in inflation expectations has been driven by elevated resource prices and the weak yen, which have placed upward pressure on the consumer price index. The year-on-year rise in Japan's annual core consumer inflation rate accelerated to 2.8% in August from 2.4 % in July. August's reading was the highest since October 2014 when it rose 2.9%. It is expected to rise to 3% or higher in September.

The rise in August, excluding the impact of the sales tax hike, was the highest since September 1991 when it rose 2.8%. It was the 12th straight increase and was caused by higher prices of food excluding perishables and energy.