MNI POLICY: BOJ Wary Rising Staff Costs May Crimp Wage Growth

Bank of Japan officials are worried about the sustainability of wage hikes as major firms will offer large wage rises this year and then endure considerably higher ongoing staffing costs, MNI understands.

Bank officials are encouraged by the willingness of large companies to implement considerable wage hikes to alleviate pressure on workers from higher prices and living costs, and they hope wage hikes will help shift people’s deflationary mindset. However, the BOJ is wary that unless profit margins can be protected by passing higher staff expenses through to retail prices, executives may be wary of raising wages next year. Wages are viewed as key to achieving the BOJ's 2% inflation target in a stable and sustainable manner.

Policymakers are also focused on whether wage hikes spread to small and medium-sized firms, which employ about 70% of all private-sector wage earners in Japan. Many smaller firms haven’t sufficiently transferred higher costs to prices, making it difficult for them to raise wages. However, they are under pressure to raise wages to secure workers amid continued labor shortages. (See MNI BRIEF: Japan Dec Wages Rise; Real Pay Turns Positive)

It will take some time for the BOJ to ascertain how wage hikes evolve at smaller firms through economic data, but bank officials expect wages to be raised at smaller firms given labor market conditions.

TIGHT JOBS MARKET

Bank officials estimate that labor supply will not return to pre-Covid-19 levels as the pace of increase in labor force participation among seniors and women is expected to decelerate. Falling labour supply reflects the declining labor force participation rate among the baby boomer generation.

The BOJ expects labor market conditions to tighten further as labor demand is expected to rise due to the economic recovery. In addition, labor supply in industries that provide face-to-face services - such as accommodation, and eating and drinking services - is susceptible to whether the number of foreign workers, for which the growth rate has decreased since the outbreak of Covid-19, will recover, the BOJ calculates.

Upward pressure on wages against the backdrop of a tightening labor market has spilled over to scheduled cash earnings of some full-time employees.

The relationship between each firm's assessment of employment conditions and its rate of change in wages shows that for large firms, labor market conditions have had no statistically significant impact on wages. However, for small and medium-sized firms, a tighter labor market has tended to push up wages.

These conditions will enable the BOJ to predict a rise in wages at smaller firms even before the bank fully ascertains smaller firms’ wage hikes through economic data, which will be available around August. (See MNI INTERVIEW: BOJ To Wait Until Aug To Gauge Wages - Momma)

BOJ economists believe real wage hikes will not be sustainable without a rise in labour productivity.