Japan's Basic Wages Rise in Aug, UBS Sees Optimism, Next Rate Hike in Dec
Japan's basic wage growth accelerated in August, coupled with businesses maintaining an optimistic outlook on prices, which could support the Bank of Japan's (BOJ) further interest rate hikes. However, due to the new Prime Minister, Fumio Kishida, expressing a dovish stance, the next interest rate hike may occur in December rather than October.
The latest data released on Tuesday showed that the basic wages of full-time employees in August increased by 2.9% year-on-year, accelerating from the 2.6% growth in July. However, real wage growth declined, with a year-on-year decrease of 0.6%, compared to a year-on-year increase of 0.3% in July, mainly due to the slowdown in bonus growth.
Citi expects that with inflation slowing down, real wage growth will turn positive again from September. It believes that starting from September, the government's subsidies for electricity and gas bills will slow down CPI inflation, thereby bringing real wage growth back to positive territory.
Analysts believe that the acceleration of Japan's basic wage growth may be gradually approaching a "virtuous cycle," that is, the relationship between higher salaries and rising consumer confidence can support the central bank's further interest rate hikes.
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At the same time, UBS survey data shows that Japanese businesses remain optimistic about price increases, especially in consumer-facing industries, where the price-setting stance remains high. The labor market remains tight, especially in the non-manufacturing sector, with many companies responding by raising wages.
Overall, analysts believe that the possibility of an interest rate hike in October is very small. After meeting with BOJ Governor Haruhiko Kuroda, Kishida stated that the current environment does not require further interest rate hikes, leading to a significant depreciation of the yen against the US dollar. Kishida later explained that this statement was based on the central bank's belief that there is enough time to consider interest rate hikes. The BOJ's summary of opinions from the September meeting also indicated that interest rate hikes are not urgent, and the next interest rate hike is expected to occur in December.
Will the next interest rate hike be in December?
UBS's report last week pointed out that Japanese businesses remain optimistic about price increases, and the labor market remains tight, both supporting further interest rate hikes:
1. Businesses remain optimistic about raising consumer prices, and as the business environment solidifies, businesses' inflation expectations and price-setting stances remain high. Despite a decline in the corporate/consumer price index and a recent appreciation of the yen, output prices remain at historical highs, especially for the non-manufacturing sector, which seems encouraging.Our pricing stance survey for the consumer sector (retail, personal services, catering) has a closer relationship with the CPI. Based on the expected consumer sector output prices, which only decreased by 1 percentage point to 33, they have generally remained at a similar level over the past nine quarters. This seems to confirm that businesses remain optimistic about price increases.
2. Businesses are experiencing an exacerbation of labor shortages, reaching a historical high. The overall employment situation for businesses in the latest survey was -36, the lowest reading since -46 in 1991. This week's labor survey showed an unemployment rate of 2.5%, a decrease of 0.2 percentage points from last month, at a historical low. At the same time, according to the survey, the overall labor force and labor supply are still moderately expanding at an annual growth rate of 0.4-0.5%. Despite this, the pace of labor supply is slower than before the pandemic (an average of about 1% in 2018-19), which is not enough to offset the labor shortage, and more companies are ensuring labor by raising wages. This indicates that as long as the labor shortage persists, upward pressure on wages may continue.
UBS further noted that more information confirms that the possibility of a rate hike in October is very small, maintaining the basic forecast for the next rate hike in December. By the December meeting (December 19), the financial market will have experienced elections in the United States and Japan, and it is more likely to calm down, providing a better environment for the Bank of Japan to raise rates. The Bank of Japan's communication after the October meeting will be key and may send a clear signal of a rate hike in December.
The new Prime Minister, Shigeo Ishihara, who is widely considered to have a hawkish stance on monetary policy, does not seem as hawkish as the market initially expected. After meeting with Bank of Japan Governor Ueda on October 2nd, he told the media, "I don't think we are in an environment that requires further rate hikes," which triggered a plunge in the yen.
The day after he made his dovish comments, he explained that this was based on the Bank of Japan's view that it has enough time to consider potential interest rate changes. On the same day, the new Finance Minister Kato also reiterated the independence of the Bank of Japan's monetary policy and promised to communicate more cautiously with the market.
In addition, the Bank of Japan also released a summary of opinions expressed at the September monetary policy meeting on October 1st, which once again confirmed that a rate hike is not imminent, and the Bank of Japan has enough time to consider potential interest rate changes.
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