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Tightening would require wage growth of at least 2%

Governor Kuroda admitted last week that inflation could hit the Bank of Japan’s 2% target in April but stressed that “that in no way signifies there will be a revision of our current monetary policy”. Even if rising import costs cause inflation to overshoot 2% as we expect, a rate hike is off the table while domestic price pressures are non-existent. The Bank has repeatedly emphasised that it would need to see a significant pick-up in wage growth before there can be any talk of tightening. To be sure, our preferred measure of wages based on a continuous sample of firms currently shows base pay growth above its pre-pandemic average at 1% y/y. But while weak productivity growth in Japan probably ensures that wage growth is transmitted more directly to inflation than in other advanced economies, we think wage growth would still have to settle at least at 2% for a rate hike to be discussed. Even as the unemployment rate gets back at its pre-virus level of 2.4% by next year, we don’t expect that to be enough to lift wage growth any higher than an annual rate of 1%. Shielded by the lifetime employment system and weak unions, firms aren’t likely to come under any pressure to substantially increase their wage bill. Long Run Outlook Drop-In (23 March, 11:00 EDT/15:00 GMT): What will be the lasting impacts of the war in Ukraine? What legacies will the pandemic leave? What does a future of higher inflation mean for economies and markets? Neil Shearing hosts this special discussion with senior economists about the long-term investing outlook on Wednesday. Register here.
Tom Learmouth Japan Economist
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