(Bloomberg) — Japan’s latest wage figures cemented expectations the central bank will hike interest rates for the first time since 2007, with the yen climbing on speculation that the move may come as soon as this month.
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Both overall monthly cash earnings and a separate set of full-time pay figures rose 2% in January, the labor ministry said Thursday. Early annual pay negotiation results released by a union federation the same day point to bigger deals this year, adding to signs that the wage trend is strengthening.
Economists and investors see the Bank of Japan scrapping the world’s last remaining negative rate either this month or in April. Bets on the March 18-19 meeting are gaining traction as reports emerge that some BOJ officials favor an early move while some government officials also support a rate hike.
The yen rallied to a one-month high Thursday, Japanese bank shares rose and government bonds dropped after the wage data and remarks from a BOJ board member who expressed confidence in inflation. Volatile overnight swaps put the chance of a March rate hike at 79%.
Read more: BOJ Is Said to Gain Confidence in Wage Growth Before Rate Call
“A March shift is more likely, because the way the BOJ has been trying to get the market to factor in a rate hike has been abrupt since the January meeting,” said Takahide Kiuchi, an executive economist at the Nomura Research Institute. “If the BOJ misses the timing of the current upturn in prices and wages, it won’t find an opportunity to revise its policy.”
The yen gained as much as 0.6% to 148.51 against the dollar, while the benchmark 10-year bond yield increased 1.2 basis points to 0.735%.
“Everything is pointing to yen buying,” said Takeshi Ishida, a strategist at Resona Holdings Inc. in Tokyo. “After an excessive drop in yen volatility and a buildup of yen shorts, both are susceptible to unwinding.”
Wages have emerged as the final piece in the puzzle as the BOJ prepares to take the view that its stable inflation target is in sight after the scars of more than a decade of deflation.
While the rest of the global central banking community raced to hike rates as prices soared across the world in the post-pandemic recovery, Japan stood its ground arguing that it needed more evidence that stronger pay could fuel stable inflation that was positive for the economy rather than damaging.
The better-than-expected wage data come as annual pay negotiations between management and labor representatives reach a peak, with the initial results from Japan’s biggest union federation expected next week ahead of the BOJ’s meeting.
‘Clear shift’
BOJ officials are getting more confident over the strength of wage growth, according to people familiar with the matter, a view backed up by board member Junko Nakagawa on Thursday.
“There are signs of a clear shift in businesses’ behavior for setting wages,” Nakagawa said during a speech in Shimane, western Japan. “Japan’s economy and inflation are steadily making progress toward meeting the stable 2% inflation target.”
A consensus has yet to clearly emerge among officials on whether the central bank should move at the end of its March policy meeting or wait until April. While some officials can back the BOJ raising rates this month given the strength in wages, others take the view that the bank won’t be able to confirm the price target is in sight by then given uncertainties over how wages will sustain inflation, the people said.
What Bloomberg Economics Says…
“Our view is that the bar is high for the BOJ. Before it considers shifting policy, we think it will want to confirm wage growth will keep its brisk pace ”
— Taro Kimura, economist
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Separately, several government officials say the central bank shouldn’t miss an opportunity to raise rates, as they see sufficient evidence of a virtuous cycle tying wages to price gains, according to another set of people familiar with the matter.
UA Zensen, a labor union consisting of over 1.8 million members from sectors including retail and restaurants, unveiled very early results of its negotiations Thursday morning. They showed full-time workers at 25 unions landing average wage gains of 6.7%, well in excess of the corresponding tally of 5.3% a year ago.
Rengo, Japan’s largest labor union federation, will follow up later Thursday with the average demands made by its unions. A year ago, that average was 4.49%, and the ultimate tally for increases wound up at 3.58%. Stronger demands from unions this year will bode well for the initial collated results of wage talks due for release on March 15.
The figures are likely to boost hopes that wages will outpace inflation, drive consumption and clear the path for the BOJ to raise rates.
The Japanese government has dedicated itself to maintaining salary growth to ensure a complete break from deflation after decades of stagnation following the burst of the nation’s asset price bubble more than 30 years ago.
Prime Minister Fumio Kishida has personally lobbied executives for large wage increases, as he seeks to mollify consumers frustrated over persistent inflation. His government has implemented a number of measures to that end, including tax breaks for companies that raise wages.
The premier reportedly plans to meet with business leaders and union leaders next week for a final push.
–With assistance from Toru Fujioka, Masaki Kondo, Yumi Teso, Daisuke Sakai and Emi Urabe.
(Adds economist comment, market moves)
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2024-03-07 00:53:00