MNI POLICY: Weak Yen Fuels Wage, Prices; Authorities Vigilant

Japanese authorities note the yen’s recent bout of weakness has helped fuel the wage-price virtuous cycle, however, they remain vigilant against rapid depreciation, despite the belief domestic and U.S. policy change will strengthen the currency, MNI understands.

The weak yen has increased exporters’ profits and wages at major firms, which has filtered through to wage hikes at other companies, an important factor the Bank of Japan wants to see before it potnetially commits to ending negative rates at either the March or April meeting. (See MNI POLICY: BOJ Sees Intact Recovery, Policy Change Ahead)

While a softer yen will also further increase import prices, raising the burden on non-manufacturers and households, the increase has enabling firms to raise retail prices and increased pressure on wages, helping change Japan’s so called "norm" – that wages and prices seldom increase.

The yen fell to JPY150.84 against the dollar on Monday, its weakest point since touching the JPY151 handle in November. Market concern over the strength of the US economy and the U.S. Federal’s response has driven the currency’s fall, which has decline about 7% YTD. The pair was trading at 149.755 on Thursday.

FED RESPONSE

The yen will strengthen should the U.S. Federal Reserve move toward rate cuts alongside any Bank of Japan policy normalisation.

BOJ officials, like Fed officials, doubt the U.S. will fall into serious recession, but they are worried worsening financial markets could slow its economy.

The Fed’s rapid rate hikes have not fully filtered through to financial markets, especially asset prices such as real estate, as long-term interest rates have remained low until recently. While Fed officials may welcome higher long-term rates, real-estate prices and financial fund positions could deteriorate and stall the economy, spoiling the BOJ’s exit plans.

BOJ PATH AHEAD

Concern over the yen’s rise and heightened uncertainty on the U.S. and Japanese economies could pressure the BOJ to bring forth the exit of its negative interest rate policy to avoid missing the chance to adjust policy. The Bank has held Japan's short-term rate at -0.10% since 2016.

The Japanese government and business has yet to flag significant concern due to the yen tipping JPY150. However, authorities remain vigilant.

Import price increases due to the weak yen will put upward pressure on the consumer price index, increasing inflation above the BOJ’s forecasts and prompting the Bank to consider raising its policy interest rate more than it initially predicted after terminating the negative rate. (See MNI POLICY: BOJ April Action Will Hinge On CPI Result)

MNI has reported the Bank expects rates to rise moderately after it exists its negative policy stance.

BOJ economists predict the year-on-year CPI to slow temporarily around summer, but are not confident on the pace of price rises afterward, as this will depend on services inflation, a key metric set for an update due to corporate annual price revisions.