MNI POLICY: BOJ Fails To Reach Inflation, Wages Agreement
MNI (TOKYO) - Bank of Japan officials have failed to reach consensus on whether the pace of inflation will accelerate this year and when the Board will next raise the policy interest rate, with a change to how it formulates its outlook suggesting greater wage pressure, MNI understands.
The Bank has recently placed more weight on the unemployment gap when determining the inflation outlook over the output gap, which suggests the labour market is tighter than previously thought and putting greater pressure on wages.
Bank officials have played down the output gap when producing an inflation view due to the distorting impact of the labour shortage, shifting to a more U.S. Federal Reserve-style focus on CPI and the unemployment rate.
The BOJ’s January Outlook Report estimated the unemployment gap at about -0.5%, producing a level of labour market tightness higher than during Japan’s early 1990s asset price bubble, which officials believe is pushing wages higher than the output gap suggests. Q3's output gap was 0.53%.
However, bank officials cannot agree on the inflationary implications or when the board will next hike the 0.5% policy rate.
MNI reported last week the BOJ saw less risk of a wage-price spiral as inflation expectations remain anchored. (See MNI POLICY: BOJ Sees Small Wage-Spiral Risk, Slower Hikes) The market has priced in a 0.84% policy rate by December, following the board’s decision in January to hike 25 basis points to 0.5%. (See MNI BOJ WATCH: Ueda Flags More Hikes, No Clear Timeline)
REAL WAGES
BOJ officials expect real wages to turn negative over January and February, after strong CPI and bonuses drove 0.5% and 0.6% increases over November and December.
Markets overacted to the positive results and BOJ officials are concerned traders could have a similar reaction to January and February’s data, but in the opposite direction.
Bank officials are confident of suitable wage hikes over fiscal 2025 amid the continued labour shortage and high costs. While they have not provided a specific forecast, they expect around 3% base pay hikes, compared to this fiscal year’s 3.56% increase, driven by 2% inflation and circa 1% productivity growth, which should be enough to achieve the BOJ’s 2% price target sustainably.
ECONOMIC GROWTH
The BOJ’s decision to lower its potential economic growth rate to around 0.5% in January's forecasts from 0.5-1.0% last October had no bearing on the Bank’s neutral rate estimate or the timing of future hikes and was driven by the Cabinet Office’s downward revision of past GDP data and a drop in total factor productivity.
BOJ officials had considered lowering the potential growth rate in October but decided to wait and monitor evolving GDP data and revisions before making a change.