Japan Wage Increases: Updated Dec. 18, 2023

 

Japan at major turning point in virtuous wage-price cycle: BOJ member

Article Source: https://mainichi.jp/english/articles/20231012/p2g/00m/0bu/039000c

Article:

TOKYO (Kyodo) -- Japan is nearing a "major turning point" in setting in motion a virtuous cycle of price and wage hikes, Bank of Japan board member Asahi Noguchi said Thursday, though he added that monetary easing is still needed to achieve desirable inflation.

"For achievement of the (BOJ's) 2 percent inflation target in a sustainable and stable fashion, nominal wage growth should clearly exceed 2 percent as an established trend," Noguchi told business leaders in Niigata Prefecture, calling the biggest pay hikes in about three decades seen in this year's wage negotiations a "breakthrough."

Ideas:

While most major economies seem to have taken a different approach by increasing the key rate, Japan has stayed the course with its monetary easing policy.

At the same time, inflation doesn't seem to have decreased that much in Japan while in the US inflation has started to decrease, as the US Federal Reserves says it might lower the key rate in 2024.

It must be remembered that wage hikes, for the most part, were only given by large Japanese companies, as 70 percent of the Japanese workforce doesn't work for large companies.

More wage hikes, for everyone else in the Japanese workforce must be a possibility, otherwise income inequality could become a major challenge for the Japanese economy.

Article:

"The biggest focus now is whether this wage hike momentum will be maintained or not," he said.

Some BOJ board members have recently expressed more confidence in future wage growth, a critical issue in its quest to ensure stable inflation. In the most recent policy meeting in September, some members said the latter half of fiscal 2023 would be critical in determining if the inflation goal is achievable.

Ideas:

There are both positives and negatives to wage growth. For example, like mentioned above, Japanese companies didn't give many wage increases, for many decades and deflation and stagnation ruled the Japanese economy.

While many large companies gave wage increases on average of 3.5 percent, that in itself was still below the inflation rate of about 4.1 percent. 

At again some 70 percent of the Japanese workforce didn't get a wage hike as most of the Japanese workforce is not employed by large Japanese companies.

But how is the large Japanese companies going to pay for the wage increases? Are they going to pass on their extra wage costs to the next in the supply chain, including the final customer, which means it could result in increased inflation.

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Japan's headline inflation has remained above 2 percent for over a year, due largely to higher costs of imported energy and raw materials. The BOJ has maintained that such cost-push inflation will ease, and ultralow rates are needed to support wage growth and the broader economy.

This year's annual "shunto" negotiations between labor unions and management resulted in an average 3.58 percent pay hike.

Ideas:

Most central banks want to keep inflation between 2 and 4 percent, as they feel that it manageable level.

But maybe the Bank of Japan feels 2 percent is good for Japan, as maybe they have a lot of older citizens now living on fixed incomes as they are more vulnerable to higher rates of inflation.

Inflation might begin to ease in late 2023 or early 2024, but there no real signs of it yet, other than energy costs beginning to decrease some.

Again, the Bank of Japan seems to using a different approach to improve the economy, as other advanced economies seem to be going the opposite

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With real wage growth in negative territory amid elevated prices, Noguchi said growth needs to turn positive, helped by the diminishing effects of rising import prices and further wage hikes.

"The BOJ's mission for the time being is to realize such an environment as soon as possible, by continuing patiently with monetary easing," he said.

In its outlook report due out in late October, the BOJ is considering raising its inflation outlook for fiscal 2023 to next March from the current 2.5 percent to near 3.0 percent, sources close to the matter have said.

Ideas:

It seems like wage hikes would actually increase inflation, in that companies after or before they gave the wage hikes they would pass-on the wage hike costs to the next in the supply chain including the possible final customer,

But also, as large company employees or any employees who got wage hikes they might spend some of the wage increase and or maybe save some of the wage increases, depending on how much extra or disposable income they have.

Japan is a resource-poor economy, which means it has to import a lot of what it needs, and is at the mercy of energy prices globally. 

At the same time, because of the difference between the US key rate and the Japanese key rate, it causes the Japanese yen to weaken while the US Dollar gets stronger.

This means imports prices into Japan have experience huge inflation increases the past two or three years.

If inflation does reach the 3.0 level again, that means more stress for Japanese households and even companies in 2024. Inflation was at the 4.1 level for awhile in Japan.

Have a nice day and be safe!