The Bank of Japan faces a stiff challenge as it strives to normalize its monetary policy at a time when growth has been slowing, while steep U.S. tariffs further threaten the country’s exports-driven economy.
Declining real wages have compounded the BOJ’s troubles. Real wages dropped at their fastest pace in 20 months in May, pressuring the central bank to raise rates and rein in inflation.
Data from the country’s ministry of health, labor and welfare shows that real wages dropped 2.9% compared to the year before, sharper than the revised 2% fall in April and also marking their fifth straight month of decline.
The wage data highlights that inflation is taking a substantial bite out of incomes in Japan, despite sharp salary hikes.
Japan’s unions secured the highest wage increase since 1991 in this year’s spring wage negotiations, with the Japanese Trade Union Confederation, or Rengo, saying last week that its members had received a headline pay bump of 5.25% for the year starting April.
However, inflation has continued to run above the Bank of Japan’s 2% target for more than three years, with the most recent reading coming in at 3.5%, diluting the net impact of wage hikes.
Government data shows that while nominal wages have risen every month since December 2021, real wages have fallen year on year for more than 30 of the 41 months since.
The BOJ has long stated that a “virtuous cycle” where higher salaries fuel growth in prices was needed for it to raise rates, but an economic slowdown appears to be constraining the bank’s ability to tighten policy.
Japan’s economy also shrunk for the first time in a year in the first quarter, contracting 0.2% quarter on quarter as exports declined, hitting the trade-dependent economy.
The path forward
Should the BOJ raise rates to curb inflation, or should it continue to hold rates steady to support growth in the Japanese economy in a time of tariff uncertainty?
Analysts have mixed views on the BOJ’s path forward.
Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, told CNBC that while’s May’s decline is “largely temporary,” real wages are struggling to grow overall, which could dampen economic expansion as consumption slows.
However, he said this slowdown in real wage growth suggests that the strength of the BOJ’s “virtuous cycle” is not as robust as expected, and could be a factor in delaying rate hikes.
In contrast, Jesper Koll, expert director at Tokyo-based financial services firm Monex Group said inflation rising faster than wages will strengthen BOJ Governor Kazuo Ueda’s commitment to hike Japan’s policy rate, which will almost immediately boost purchasing power for the man on the street by way of a stronger yen.
This is because one-third of the Japan’s consumer price index is directly linked to import prices, he said, and a stronger yen will reduce imported inflation.
Vishnu Varathan, managing director at Mizuho Securities puts it simply: “The optimal game-plan for the BOJ may be to do nothing. Sitting on its hands to affirm the tightening bias (albeit much further out) as it rides out tariffs uncertainties.” The U.S. has threatened to impose 25% tariffs on Japanese imports from Aug 1.
Varathan said that the BOJ ought to arguably step back, and not step in: the BOJ probably has no scope for further hikes, due to fears of crimping domestic demand.
Governor Ueda last month expressed confidence that Japan’s economy would be able to withstand the downward pressure from U.S. tariffs, adding that the cycle of rising wages and prices will not be interrupted.
Source: CNBC