TOKYO: Japan is about to see whether wage hikes will be strong enough to prompt the central bank to conduct its first interest rate hike since 2007 as early as next week, a move that would influence prices on everything from financial assets to mortgages to daily necessities.
A wide range of unions are poised to release results from negotiations.
The Japanese Association of Metal (JAM), Machinery and Manufacturing Workers said yesterday that 60 affiliated unions secured an average pay increase of 5.32%, exceeding last year’s tally by a large margin.
Toyota Motor Corp, an industry bellwether, said it agreed to its union’s pay demands in full. An earlier report to that effect boosted the yen and weighed on Japanese stocks.
The Japanese Trade Union Confederation (Rengo), the nation’s biggest union federation, will give its first tally of annual wage deals reached by employers and labour representatives tomorrow.
Bank of Japan (BoJ) officials will decide whether to raise rates this month after officials see the initial tally from spring wage talks, with the outcome currently too close to call, according to people familiar with the matter.
The union federation said last week that its affiliated members demanded an average wage increase of 5.85% this year versus 4.49% a year ago, when the process resulted in a preliminary 3.8% bump.
Last year’s Rengo result was the biggest increase in decades, and if this year’s tally tops that figure, as economists expect, it will send a strong green light to the BoJ to end the world’s last negative interest rate.
If wage increases fall short of that threshold, the outlook for rate policy will cloud over.
“Today’s figure far exceeded our initial expectations when we formulated our demand,” said Katahiro Yasukochi, chairman of JAM.
BoJ governor Kazuo Ueda is paying close attention to the results as he and his board decide whether their long-sought goal of 2% sustainable inflation has come into sight. They want to see a virtuous cycle tying rising wages to demand-led price gains.
“Governor Ueda said the spring wage talks is a key event. If results beat last year’s 3.8%, I think the BoJ should end the negative rate,” said Mari Iwashita, chief market economist at Daiwa Securities Co.
“They can move in April, too, but they will have to raise interest rates by making excuses as they will likely have to lower their growth outlook.”
That sets up the Rengo result as a key focal point for market players trying to gauge when the BoJ will move.
Volatile overnight swaps already favour a March move over April as speculation of an early rate hike has mushroomed in the last week or so.
Volatile moves in markets are likely to continue in the run-up to the BoJ’s move towards policy normalisation and beyond.
Stocks, which recently hit an all-time high, will probably take a hit along with bonds if policy changes.
The BoJ refrained from buying exchange traded funds on Monday despite a slump in equities, a move that further fuelled speculation of March move. Ueda has pledged to keep buying Japanese government bonds to avoid havoc in the market.
A policy shift is likely to be positive for the yen as it would help narrow the interest rate gap between Japan and the United States, especially if the Federal Reserve kicks off its easing cycle later this year, as is widely expected.
The political stakes are high, too. Prime Minister Fumio Kishida has seen his support slide to fresh lows partly due to frustration from households burdened by a persistent slide in real wages.
Weak results might reinforce perceptions that he hasn’t done enough, adding to risks that he may be replaced in a September race for the leadership of the ruling Liberal Democratic Party.
“Results are important for Kishida whose popularity is already low,” Iwashita said. “That’s why the government has done a lot to call for wage hikes, which should be a supportive factor for the government to declare an exit from deflation.”
Today a group of services unions representing more than 1.8 million workers will update the results of their agreement. Some of their full-time workers already secured average pay increases of 6.7%, according to the first tally last week.
In Japan, unions at the biggest companies report results first, setting the tone for smaller ones that will divulge outcomes later. — Bloomberg
