Wage agreements in Japan may lead to BoJ policy change

Japan’s largest labor organization, the Confederation of Japanese Trade Associations (Rengo), announced that this year’s first round of wage negotiations with employers resulted in an average wage of 5.28 percent. This rate was the highest level in 33 years.

While the raises among smaller companies were on average 4.42 percent, some large companies announced that they would give their employees higher raises than the demand.

Japanese steel company Nippon Steel offered its employees a raise of more than 14.2 percent, while Japanese automakers offered a raise of more than 5 percent for employees to offset inflation.

Japan’s largest automaker, Toyota, has fully accepted workers’ demands and offered the biggest wage increase since 1999.

The company accepted the union’s demands for a monthly wage increase of up to 28,440 yen ($194) and record bonus payments. Another automaker in the country, Nissan, also welcomed the union’s demand for an average monthly wage increase of 18,000 yen.

Japan Airlines, in the service sector, announced that it would give its employees an average raise of 6 percent, the highest base salary increase since 1992.

Japan’s cultural focus on job security rather than higher wages is often cited as the main reason for the country’s long-standing stagnant wages.

AVERAGE WAGE INCREASE IS EXPECTED TO EXCEED 4 PERCENT THIS YEAR

According to 5,272 unions affiliated with Rengo, the average wage increase in spring 2023 was 3.58 percent.

The average is expected to be above 4 percent this year, with many large firms offering strong wage increases, analysts said.

According to estimates by Japanese investment bank Nomura, employees of large Japanese companies can expect an average wage increase of 5.1 percent.

IT PAVENS THE WAY TO MOVE AWAY FROM THE ZERO INTEREST POLICY

Annual wage negotiations, called “shunto” (spring wage war) in the country, end this month, and developments are being closely watched by policymakers as they could be a factor that could affect the Bank of Japan’s (BoJ) ultra-loose monetary policy.

While the BOJ has long sought to raise real wages, Japan’s conservative governments want to stimulate a positive inflation cycle in which wages rise faster than prices, thereby stimulating domestic demand.

While real wages in the country have fallen for 22 consecutive months, officials who direct the Japanese economy expect sharp wage increases to increase household spending and lead to more stable economic growth.

While employee incomes in Japan are falling further behind in international comparisons, it is stated that the highest wage increases in the country in recent years have also paved the way for the BoJ to move away from its zero interest policy.

BOJ’S MEETING NEXT WEEK IS THE FOCUS OF MARKETS

The announcement of wage increases by major Japanese companies over 2023 increases expectations that the positive wage trends will provide the BoJ with leeway to make fundamental policy changes.

The BoJ, which will decide on the key interest rate on March 19, sees strong wage growth as an important prerequisite for an orderly move away from the zero interest policy that has been implemented for years.

Analysts say the bank may now be moving towards a turnaround in interest rates as inflation has been above the central bank’s 2 percent target for more than a year and expectations for sustainable wage growth are rising.

Meanwhile, Japan’s average headline inflation, which was 3.2 percent last year, dropped to 2.2 percent in January.

On the other hand, Jiji Press, one of Japan’s two largest agencies, reported that the BoJ has made final arrangements to end negative interest rates at next week’s monetary policy meeting.

INTEREST RATES WERE LAST INCREASED IN JAPAN IN 2007

BoJ has been carrying out the practice called yield curve control since 2016. It keeps the policy rate unchanged at minus 0.1 percent and caps the 10-year Japanese government bond yield at around zero.

BOJ Governor Kazuo Ueda had announced that the outcome of this year’s wage agreements was a decisive criterion for the return of interest rates.

Japanese Prime Minister Kishida Fumio also called on companies to increase wages, stating that this would help Japan overcome years of deflation.

While the BOJ has been laying the groundwork to end negative interest rates since the end of last year, it is also noteworthy that Japanese government officials are increasingly looking favorably on exiting negative interest rates in March.

The last interest rate increase in Japan dates back to 2007. Unlike other major industrialized countries, Japan has long struggled with disinflation, which means a slowing of the rise in inflation.

PRICES WERE AFFECTIVE IN WAGE INCREASES

One factor in the change of heart among unions and companies on wages was the price increase following the Covid-19 pandemic and the start of Russia’s war in Ukraine, which pushed Japan from deflation to inflation.

Due to the accelerating population decline, labor shortage also came to the fore. While the workforce in Japan is currently decreasing by more than 600 thousand people every year, this number is gradually increasing.

The possible return of the BoJ’s interest rates, which has so far avoided the global interest rate increase wave, will be the first interest rate increase in the country since 2007.

The BOJ’s exit from negative interest rates is expected to affect not only companies and households, but also global money flows.