March 05, 2024 (MLN): Japan is shaking off its deflationary mindset and, with wage growth becoming self-sustaining, the Bank of Japan (BOJ) is likely to embark on gradual policy normalization in the coming months, says Fitch Ratings in a new report.
Japan’s labor market remains historically tight: the unemployment rate is low, labor mobility is rising, and a majority of companies report that they are struggling with a lack of workers.
Although this is not yet reflected in headline labor cash earnings growth, underlying wage growth (which strips out volatile overtime and bonus payments) has been rising, to 1.6% yoy in December.
The 2024 spring wage negotiations (Shunto) look likely to result in higher wage increases than last year, with some big employers already agreeing to union demands. The BOJ has emphasized the importance of the Shunto outcome in its policy thinking.
Higher wage inflation is likely to be reflected in consumer prices, as companies with healthy corporate profits become more confident in passing on higher labor costs.
Services inflation, which is more sensitive to domestic conditions, has remained above 2%.
The labor share of income has also increased, suggesting a more inflationary environment. In the past few years, unit labor costs have risen, in contrast to persistent falls in Japan’s deflationary period of 1998-2013.
“Unlike central bankers in other developed markets, the BOJ does not fear second-round effects. Quite the opposite. We expect the BOJ to take advantage of this reflationary environment to exit negative rates, but the policy stance will remain very accommodative through 2025,” said Jessica Hinds, Director at Fitch Ratings.
