Early last month, I asked if the “permafrost” was finally thawing in Japan.
Fast Retailing had announced planned wage increases of up to 40%, in what Reuters optimistically called “clear” evidence that Japan’s notoriously stagnant pay growth “may be starting to budge after decades of deflation and cost-cutting.”
This sounds like a terribly dull debate, but it matters immensely in the macro context, and it’s especially relevant in 2023 amid widespread speculation that the Bank of Japan may jettison its yield-curve control program.
Part and parcel of the BoJ’s quest to engineer sustainable 2% inflation is an effort to get regular pay growth up to 3%. The BoJ views that as something akin to a religious imperative. On Tuesday, data showed nominal cash earnings rose 4.8% in December on a YoY basis.
That was the briskest pace since 1997 and more than two full percentage points higher than economists expected.
Although that sounds impressive, the market reaction suggested its relevance for policy was limited. Everything hangs on spring wage negotiations and the yen is pondering the possibility of a continuity pick to succeed Haruhiko Kuroda, who steps down as BoJ chief in April.
Nikkei this week said Masayoshi Amamiya was approached for the top job. He’s deputy governor now, and if he does indeed step into Kuroda’s position, that may frustrate bets that the BoJ will rapidly unwind its multi-faceted easing regime. The bank declined to deliver another shock adjustment to the yield-curve control band at its meeting last month, after blindsiding markets with a tweak in December.
A cursory glance at December’s nominal wage data shows bonuses did the heavy lifting. They rose 7.6% from the prior year. Scheduled pay, by contrast, rose less than 2%. Real wages are under pressure from what, in the Japanese context, counts as scorching-hot inflation.
CPI excluding fresh food ran at a 4% pace during December, the latest data showed. That was the highest since 1981.
Policymakers are, for now anyway, inclined to look through all of this — the high inflation, the bonus-fueled earnings growth, all of it.
Government subsidies are expected to cool prices in the months ahead, and many believe December’s print likely marked the peak for CPI. Even if wage pressures do suggest a broad-based reset, it seems unlikely that base pay gains will be sufficient to satisfy the central bank, which wants irrefutable evidence that pay growth is running at or near 3% before considering a wholesale rethink of policy settings.
Goldman last month lifted its forecast for base wage increases from the spring wage negotiations to 1.2% and 2.8% including seniority-linked raises. Average annual pay is about $40,000 across the world’s third-largest economy, nowhere near the OECD average. As of 2021, it was almost 44% below the US. Wages have been flat in Japan for decades, even as average nominal pay across OECD nations has risen steadily.
Separate data showed inflation-adjusted household spending fell 2.1% in December. That doesn’t exactly suggest consumers are feeling good about things.
