BoJ: Waiting for wage growth

Since early April when Kuroda unveiled the BoJ’s momentous pledge to double Japan’s monetary base within two years, each subsequent Policy Board meeting has been a non-event. The conclusion tomorrow of the latest BoJ get-together seems bound to be the same. And looking ahead, the probability of any significant amendments being made to the BoJ’s policies over the remainder of this year appears very slim too.

The Policy Board’s inactivity is hardly a surprise. For a start, the BoJ's balance-sheet expansion has barely begun, with about ¥25trn of JGBs bought since end-March leaving almost ¥100trn more to go before the end-14 monetary-base target has been met. And despite the weaker June data – including a drop of more than 3%M/M in manufacturing output (the steepest since the March-11 quake) and the largest monthly fall in private consumption for almost a year – Japan's recovery appears relatively well established and probably as strong as the BoJ dared have hoped. Indeed, over the second quarter as a whole, private consumption was up for the third consecutive quarter and by 0.4%Q/Q, which should have contributed around 0.2ppt to GDP growth, while export growth of more than 3½%Q/Q should see net trade having added as much as ½ppt. So, when the first estimate of Q2 GDP is published on Monday, the economy looks set to have comfortably expanded for the third consecutive quarter and by around 0.9%Q/Q, a fraction below the rate in Q1.

Surveys suggest that the June data will represent a temporary adjustment and the flow of positive activity and inflation data will be sustained over coming quarters. That might well provide sufficient cover for Abe to proceed with the first consumption tax hike in April. But the key litmus test for the Kuroda’s initiatives will be labour earnings, which the BoJ is all too aware will need to rise if it has any chance of hitting its inflation target. In June these remained disappointingly subdued, with total earnings up just 0.1%Y/Y following a decline of the same magnitude the previous month. Bonus payments, a recent source of earnings growth, were up just 0.4%Y/Y. And more importantly, regular earnings were down on a year-on-year basis for the thirteenth consecutive month.

Other indicators, however, suggest a firming of Japan’s labour market. For example, in June the job-to-applicant ratio rose to a five-year high, while the number of people employed was almost 300K higher than a year earlier to leave the unemployment rate at 3.9%, its lowest since October 2008. That is not far above our estimate (or indeed that of the BoJ) of the ‘structural’ unemployment rate. Indeed, over the past two decades, the current rate of unemployment tended to be consistent with rising wages and prices.

So, while unemployment is probably still some way above rates likely to generate the kind of wage growth required to hit the 2% inflation target, if it maintains its downward trend over coming months earnings should rise when the main wage-setting rounds get underway in the New Year. Only if the BoJ then sees no evidence that basic wages are rising substantially is it likely to be prepared to change monetary policy. And particularly if Abe decides to press ahead with the consumption tax hike next April, a measure that would risk taking the wind out of the sails of Japan’s recovery from Q214 on, a pre-emptive expansion of the BoJ’s asset-purchase programme around the same time would be timely.

Unemployment rateUnemployment RateSource: MIC, MHLW and Daiwa Securities

Regular earnings and unemployment rateUnemployment Wages
Source: MIC, MHLW and Daiwa Capital Markets Euorpe Ltd.


Emily Nicol, Economist

Chris Scicluna, Head of Economic Research

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