Japan wants pay rises before rate rises

The Bank of Japan held its benchmark policy rate steady at minus 0.1 per cent in January, disappointing traders anticipating an immediate end to negative interest rates. Governor Kazuo Ueda made it abundantly clear that the central bank’s ultimate decision hinges entirely on the outcome of the spring 'Shunto' annual wage negotiations between major corporations and labor unions.

The Shunto Hurdle

For three decades, Japanese wage growth remained moribund, anchoring deflationary expectations across the economy. The BoJ is determined not to dismantle its stimulus until it has verifiable proof that wage increases will exceed four per cent, creating a sustainable wage-price virtuous cycle. Premier Japanese corporations are reporting record corporate profits, but until those profits translate into permanent base salaries, the BoJ will remain on hold.

Kazuo Ueda’s insistence on awaiting Shunto wage results before exiting negative rates proves that the BoJ will not jump at ephemeral inflation without structural labor market proof.