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THE Bank of Japan’s (BOJ) governor and one of its board members said on Thursday (Mar 7) the economy was moving towards the central bank’s 2 per cent inflation target, in comments that heightened market expectations of an imminent end to negative interest rates.
The remarks came as Japan’s largest trade union group Rengo said average wage hike demand hit 5.85 per cent for this year, topping 5 per cent for the first time in 30 years and heightening prospects of a broad-based pay rise that the BOJ set as a prerequisite for a stimulus exit.
BOJ board member Junko Nakagawa said the country’s intensifying labour shortages were prodding more companies to resume their practice of increasing pay annually, signalling conviction that conditions for phasing out the bank’s massive stimulus were falling into place.
“We can say that prospects for the economy to achieve a positive cycle of (rising) inflation and wages are in sight,” Nakagawa told business leaders in the southwest Japan city of Matsue.
“There are clear signs of change in how companies set wages. Japan is moving steadily towards sustainably and stably achieving our 2 per cent inflation target,” she said.
The remarks came amid growing market expectations that the BOJ could exit negative interest rates this month, fuelled in part by a media report on Wednesday that at least one of its board members could call for such an action this month.
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The growing momentum for a March stimulus exit lifted the yen to a one-month high against the dollar, and pushed up government bond yields, a trend that continued on Thursday.
Analysts have tipped either the March or April meetings as possible timings of the pivot. Back in mid-February, most polled by Reuters saw April as far more likely because that is when the BOJ produces fresh quarterly growth and inflation forecasts.
Nakagawa’s remarks follow those of fellow BOJ board member Hajime Takata, who said last week Japan was finally seeing prospects it could durably achieving the bank’s 2 per cent inflation target.
BOJ governor Kazuo Ueda added to the hawkish chorus later on Thursday, saying the likelihood of achieving the bank’s inflation target was gradually rising.
“If we confirm that a positive wage-inflation cycle is strengthening, we can examine modifying our massive monetary easing measures,” Ueda told parliament.
“Regardless of whether we ditch or maintain yield curve control, we will continue to buy long-term bonds,” he said.
Despite recent weak signs in the economy, BOJ policymakers have signalled their intention to move ahead with their plan to dial back stimulus – including Ueda, who offered an upbeat take on Japan’s economic outlook last week.
Japan’s real wages shrank in January for the 22nd straight month but at the slowest pace in over a year, data showed on Thursday, as price pressures from rising food and raw material costs dissipated.
In an effort to reflate growth and keep inflation sustainably around 2 per cent, the BOJ guides short-term interest rates at -0.1 per cent and sets a 0 per cent target for the 10-year bond yield under a policy dubbed yield curve control (YCC).
It also buys huge amounts of government bonds and keeps in place a framework to buy risky assets such as trust funds investing in stocks and property.
BOJ officials, including Deputy Governor Shinichi Uchida, have signalled that the central bank will overhaul all of the tools when debating an exit from negative rates.
Governor Ueda has said the outcome of this year’s annual spring wage negotiations will be key to how soon the BOJ can phase out the monetary easing measures.
Big firms will settle their wage negotiations with unions on March 13, days before the BOJ’s policy meeting on March 18-19.
While pointing to some positive signs on the wage outlook, Nakagawa said there was a risk that wages fail to rise enough and hurt household sentiment, thereby cooling consumption.
“Consumption appears weak in both real and nominal figures” despite a return in activity after the Covid-19 pandemic, Nakagawa told a news conference after the meeting with business leaders, adding that developments in consumption were key to her decision on the timing of an exit.
“It’s also important to note that wage hikes, and hopes of continued wage increases, will likely underpin consumption.” REUTERS
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