Bank of Japan maintains loose policy, spring labor negotiations become focus

The Bank of Japan held its first monetary policy meeting this year on the 23rd and decided to maintain the current loose monetary policy unchanged, in line with general market expectations. Analysts pointed out that recent inflation trends and wage growth in Japan support the Bank of Japan to continue to remain on hold. The outcome of labor negotiations this spring will be the key to whether the Bank of Japan can start raising interest rates this spring.

Bank of Japan maintains loose policy

The Bank of Japan announced after the two-day monetary policy meeting that ended on the 23rd that it will continue to maintain ultra-loose monetary policy, maintain the upper limit of the long-term interest rate control target at 1%, and maintain short-term interest rates at minus 0.1%.

The Bank of Japan maintained its judgment on the current economic status unchanged on the 23rd, that is, the Japanese economy is recovering moderately. The Bank of Japan remains cautiously optimistic about the inflation outlook, saying that the possibility of stably achieving the 2% price increase target is gradually increasing. The Bank of Japan lowered its forecast for Japan's core consumer price index (CPI) in fiscal year 2024 (starting in April) from 2.8% to 2.4%, and raised its forecast for fiscal year 2025's core CPI from 1.7% to 1.8%.

Data released by Japan’s Ministry of Internal Affairs and Communications on the 19th showed that Japan’s average core CPI excluding fresh food in 2023 increased by 3.1% year-on-year, hitting a 41-year high. As of December 2023, Japan's core CPI has increased year-on-year for 28 consecutive months and exceeded the Bank of Japan's 2% inflation target for 21 consecutive months. This has led to continued expectations that Japan may slowly exit its loose monetary policy this year.

However, in December 2023, Japan's core consumer price index excluding fresh food was 106.4, a year-on-year increase of 2.3%. The increase has slowed down compared with the 2.5% in November, and has shrunk for two consecutive months. It is the lowest rate in the second half of 2022. lowest level in six months.

Specifically, food prices in Japan increased by 6.7% year-on-year, and the increase has slowed down; the prices of furniture and household supplies increased by 6.5%; and the prices of cultural and entertainment commodities increased by 7.8%, of which accommodation fees increased by 59.0% due to the arrival of the peak tourist season. Energy prices fell by 11.6% that month, with electricity and gas charges falling by 20.5% and 13.8% respectively.

Analysts believe that a stable inflation rate is an important condition for Japan to revise its monetary policy. The recent inflation situation in Japan still supports the Bank of Japan to continue to remain on hold.

Data previously released by the Bank of Japan showed that Japan’s “supply and demand gap” was negative 0.37% in the third quarter of last year, showing negative growth for 14 consecutive quarters. A negative "supply-demand gap" indicates excess supply, which can easily lead to deflation.

Wage growth becomes a key factor

Some analysts believe that with the fall in inflation and the continuous decline in wage growth, the Bank of Japan is not very motivated to raise interest rates in the short term, but it is already ready to normalize monetary policy and has begun to flexibly adjust earnings since July 2023. Rate Curve Control (YCC) policy. The Bank of Japan hopes that the current cost-driven inflation will change to inflation driven by strong demand and wage growth. Wage growth will become the decisive factor in adjusting monetary policy. If the results of labor negotiations in March meet expectations, the Bank of Japan may end negative interest rates this spring, and the first interest rate increase is expected to wait until at least April or even later.

Bank of Japan Governor Ueda Kazuo expressed the hope that Japan can get rid of the low-inflation environment and achieve a virtuous cycle of wages and prices. Whether "a significant and sustained increase in wages is key" in the spring labor negotiations in 2024 is key.

A report released this month by the Organization for Economic Cooperation and Development (OECD) recommended that the Bank of Japan should begin to slowly raise interest rates. The report predicts that Japan's consumer price index will remain at 2% from 2024 to 2025, and wage growth will also increase.

The market is currently looking forward to this spring’s labor negotiations. The average wage increase in spring 2023 labor negotiations is 3.58%, the highest level in 30 years. Some analysts predict that this year's spring labor negotiations may raise the level of wages higher than last year, reaching about 4%.

Kyodo News reported that corporate leaders have revealed their intention to raise wages in the spring labor negotiations launched this week, but there is still uncertainty about whether small and medium-sized enterprises can keep up with the pace of large enterprises.

Currency normalization has a long way to go

Some analysts pointed out that even if Japan starts to raise interest rates and enters the track of currency normalization, it still has a long way to go and will face multiple uncertainties, such as inflation trends, a virtuous cycle formed by rising wages and prices, and the pace of interest rate cuts in the United States and Europe.

For the Bank of Japan, even if the labor negotiations this spring achieve better results in wage increases, it will still take time to judge whether wage increases can create a virtuous cycle of rising prices.

Strong demand leads to a tight labor market, with wage increases exceeding price increases, thereby boosting consumption and further promoting production and corporate efficiency. This virtuous cycle is what the Bank of Japan most hopes to see as a sign of getting rid of long-term deflation.

Some analysts believe that the current wage increase in Japan is not due to increased labor demand. Japan's energy and raw material import prices have risen, and the depreciation of the yen has strengthened this trend. Enterprises have passed on the cost of rising prices to consumers. The increase in wages under this model has not guaranteed the improvement of workers' living standards.

Statistical results released by Japan's Ministry of Health, Labor and Welfare this month show that after deducting price increases, Japan's real wage income in November 2023 fell by 3.0% year-on-year, declining for 20 consecutive months. The continued decline in real wages will suppress household purchasing power, affect consumption and drag down Japan's economic recovery. This shows that the simultaneous rise in wages and prices has not truly achieved a virtuous cycle.

In addition, whether Japan's monetary policy will "run counter to" that of the United States and Europe has also become a risk factor facing the Bank of Japan. Against the background of continued sharp interest rate hikes in the United States and Europe, the Bank of Japan has maintained a large-scale monetary easing policy. The significant divergence of monetary policies has led to a significant depreciation trend of the Japanese yen. At present, the outside world is generally expected to start cutting interest rates in the spring. Once the Bank of Japan lifts negative interest rates, the direction of monetary policy will be opposite to that of the Fed.

In terms of the pace of normalization of monetary policy, some analysts believe that even if the Bank of Japan lifts negative interest rates this spring, it will not take radical measures immediately. It is expected to proceed slowly, and it may take about three years to finally normalize interest rates. The final interest rate may rise to the level of 2% for long-term interest rates and 0.5% for short-term interest rates.