Economy

Analysis-Wages and not the yen are key indicators of when Japan moves away from ultra-low rates By Stocksak


© Stocksak. FILEPHOTO: A graph of the currency exchange rate is shown with U.S. dollars banknotes and Japanese Yuen in this illustration taken June 16, 2022. REUTERS/Florence Lo/Illustration

By Leika Kihara

TOKYO (Stocksak), – A solid wage growth and not a spiralling Japanese yen will likely be the trigger to drive the Bank of Japan away form its ultra-low interest rate. The policymakers stubbornly believe that a tight labor market will eventually revive consumer desire.

The BOJ will not raise interest rates because Japan’s economy is still weak. However, it will likely keep the yen under pressure, which has fallen to 32-year lows against USD and inflated import prices for businesses.

However, the BOJ’s controversial bond yield limit could be shifted to April next year by four sources familiar with the central banks’ thinking. This is when companies and labour unions will set next year’s wages, which will reflect the rise of inflation in 2022.

Analysts say that Governor Haruhiko Kuroda will see his second five-year term expire in April. This opens the possibility of a shift away from his radical stimulus plan.

One source said that Japan has a unique opportunity to see a positive wage inflation cycle begin. “It’s also a crucial moment for Japan in deciding how to limit its yield.”

Investors are alert for when the BOJ will change its status of a dovish outlier in global central banks. This is done by tweaking yield curve control, which allows it to set negative short-term rate and cap the 10-year bond yield at zero.

If the BOJ were to alter YCC, it would likely take two steps: either increase the 10-year yield target or widen the implicit 50 basis-point band around it.

The market could feel the repercussions. A slight increase in the yield target could cause a massive bond selloff. This is because it means that the BOJ can relax the 10-year yield limit through unlimited bond buying.

LOW RATES WILL NOT LAST FOREVER

The BOJ has ruled out rate hikes to stem yen drops, as Japanese law gives jurisdiction to the government and not the central bank.

Japan’s low interest rates are not permanent, however. The BOJ’s carefully crafted guidance gives it the flexibility to adjust the YCC targets until inflation stably reaches 2%. However, it must maintain loose monetary conditions overall.

According to sources, some BOJ officials think there is room to discuss a YCC tweak next year, if wages rise sufficiently and increase prospects of achieving demand driven inflation of around 2%.

According to a second source, “The key is whether wages and income increase.” According to the source, “If they do, it could lead to conditions that allow us to discuss a policy tweak.”

Although wages have not risen in recent years it is possible that they will this time. Inflation has risen to 2% in September due to stubbornly high raw material costs. This is six consecutive months of record-breaking prices.

A survey of companies revealed that they expect inflation to reach 2.2% within five years. This is a sign Japan might finally be moving out of its deflationary trap.

Japan’s main umbrella union Rengo stated that it will demand wage increases of around 5% next fiscal year to compensate for rising inflation. This is in addition to the 4% target for this year.

Analysts agree that actual wages rose only 2% in the first half of this year, despite the union’s ambitious target, and Kishida’s emphasis on driving up the pay pile, which puts pressure on companies to increase their salaries.

According to a third source, “The outcome wage negotiations will be crucial” when gauging BOJ’s policy outlook. “There’s hope that things could turn around more positively than in the past.”

Kuroda is ignoring public criticism by doubling down on YCC. He thinks that recent cost-driven inflation will be temporary and warns about global recession risks.

The nine-member BOJ board is not in agreement on the speed at which the bank should remove stimulus. Asahi Noguchi, a dovish board member, stated in April that wages must rise by close to 3% in order for BOJ to adjust its loose policy.

Public sentiment is turning against YCC, as the weak yen drives up the cost-of-living. Prime Minister FumioKishida is being scrutinized in parliament.

Despite the BOJ’s aggressive bond-buying, yields on superlong bonds have risen to multiyear highs. This casts doubt on the effectiveness and efficiency of YCC.

The changing public mood, and the growing signs that inflationary tension may last longer, could tilt the BOJ board to at least debate a tweak in YCC before Kuroda heads towards the door.

“There is a question as to how long the BOJ should keep its current policy,” said a fourth source. “It’s an area that could become more urgent next year.”

News Source and Credit

Stocksak Editorial

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