Japan's Central Bank May Approach Rate Hikes Cautiously Amid Economic Challenges
A recent statement by a member of the Bank of Japan (BOJ) suggests that there is a need to gradually increase the benchmark interest rate, which may reinforce market expectations that the BOJ will maintain its current policy stance at this month's policy meeting. Analysts have pointed out that against the backdrop of sluggish personal consumption in Japan, a lack of momentum for stable recovery, and the economy being plagued by various structural challenges such as population decline, the BOJ may have no intention of "hastily" raising interest rates.
The central bank hints that interest rate hikes should be "slow rather than hasty."
On October 16, BOJ Policy Board member Seiji Adachi stated that the BOJ should raise interest rates at a "very moderate" pace. "I believe there is currently no need to quickly raise interest rates to curb inflation. On the contrary, hasty interest rate hikes should be avoided," Adachi said, adding that with the Federal Reserve's recent initiation of rate cuts, the yen may strengthen against the US dollar, slowing the rise in import product prices.
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Adachi noted that while economic data supports the rationality of policy normalization, there is also a risk that raising interest rates too quickly could push the economy back into deflation. Therefore, adopting a gradual approach to interest rate hikes is appropriate.
The BOJ ended its negative interest rate policy in March of this year, marking the first interest rate increase in 17 years, and also raised rates in July, maintaining the policy interest rate at 0.25% in September. The BOJ is scheduled to hold a monetary policy meeting on October 31, and the market widely expects the BOJ to continue its current policy stance. Adachi's emphasis on a gradual tightening pace may fuel speculation that the BOJ will not raise interest rates again this year.
Shigeru Ishiba, the president of Japan's Liberal Democratic Party, was elected as the 102nd Prime Minister of Japan on October 1. His recent statements on financial policy have unsettled the market. Before the election, Ishiba repeatedly stated that ultra-loose monetary policy has led to a weak yen, a surge in import prices, and persistent inflation that has lowered the quality of life for the public, implying a preference for yen appreciation and fiscal tightening in financial policy. With the news of Ishiba's election, the yen rose sharply, and the stock market plummeted. Ishiba immediately changed his tone, stating that he would respect the BOJ's decisions, and after meeting with BOJ Governor Haruhiko Kuroda, he said, "I personally believe that there is no environment for further interest rate hikes at present." Ishiba also signaled that he would prioritize measures to stimulate the economy and maintain market stability.
After Ishiba changed his stance, the yen weakened significantly against the US dollar, and the Tokyo stock market also stabilized and rose. The Nikkei 225 Stock Average rose for the fourth consecutive trading day on the 15th, briefly climbing above 40,000 points for the first time in three months.
Stefan Angrick from Moody's Analytics believes that Ishiba's comments have somewhat disrupted the near-term outlook for interest rates and the yen, making the economic outlook more uncertain. However, the possibility of interest rate hikes still exists. "The BOJ's latest stance is very optimistic about the economy, indicating that it is still seeking interest rate hikes."
Focusing on the issue of wage increases for small and medium-sized enterprises (SMEs), the BOJ's quarterly report last week upgraded its assessment of the Japanese economic situation, thanks to the steady recovery of the economy from the major earthquake earlier this year and the resumption of automobile production following recent automotive safety certification scandals.However, the Japanese economy still faces the severe challenge of persistent inflation leading to weak domestic demand. Previous policies such as energy price subsidies will expire one after another, and Shigeru Ishihara has repeatedly stated that new price subsidy policies will continue to be introduced.
The Ishihara cabinet has begun to compile a supplementary budget for fiscal year 2024. On the 15th, Ishihara stated that the scale of the supplementary budget for fiscal year 2024, compiled to fund new price subsidy policies, may exceed the scale of the supplementary budget for fiscal year 2023, which is about 132 trillion yen. Ishihara emphasized the need for strong personal consumption to support the economy and announced plans to distribute cash to low-income families and increase financial assistance to remote areas.
In the autumn of 2021, against the backdrop of the yen's depreciation and a sharp rise in international market energy prices, Japan, which had been in deflation for a long time, began to see rising inflation. Fumio Kishida, who took office as Prime Minister of Japan in October of that year, tried to boost consumption by expanding labor distribution and achieving a virtuous cycle of price increases and wage increases. He achieved the largest wage increase in history during his tenure, and the economy showed signs of breaking away from deflation. However, due to the general rise in the prices of daily necessities, Japanese households have not yet truly felt the increase in wages.
Wage growth has become one of the main election issues for the Japanese House of Representatives election to be held on the 27th of this month. The ruling Liberal Democratic Party led by Shigeru Ishihara has promised to take measures to ensure wage increases.
Ishihara has repeatedly emphasized that personal consumption currently accounts for 54% of Japan's GDP, and the economy will not improve if personal consumption does not increase. The government will continue to promote wage increases for companies, strive to boost domestic demand, and strive to completely pull the Japanese economy out of deflation in three years. Ishihara stated that he would not be satisfied with wage increases for large companies, emphasizing the creation of a policy environment for wage increases for small and medium-sized enterprises, and pursuing "wage increases exceeding price increases."
Japan's Minister of Economy, Trade and Industry, Yasuhiro Taketomi, stated that the supplementary budget will continue to support small and medium-sized enterprises in saving labor investment, encourage small and medium-sized enterprises to improve productivity, and achieve a virtuous cycle of wage increases and alleviating labor shortages; strengthen price transfer countermeasures to help small and medium-sized enterprises complete cost transfers.
Ishihara also proposed to increase the minimum wage, and is committed to raising Japan's average minimum wage from the current 1055 yen per hour to 1500 yen by 2030.
In this year's spring labor negotiations, Japanese corporate management and trade unions reached a consensus on the necessity of raising wages against the backdrop of soaring prices, and trade unions obtained an average wage increase of 5.1%, which is the first time in 33 years to exceed 5%.
An informed person said on the 16th that Japan's largest trade union organization, the Japanese Trade Union Confederation (Rengo), will demand a wage increase of 5% or more in next year's spring annual wage negotiations to maintain the current momentum of wage growth. The source said that although the target is the same as this year's wage negotiation target, the organization will also set a target of a 6% or higher wage increase for small and medium-sized enterprises.
The sharp depreciation of the yen has led to a decline in the standard of living for households, and the economic burden on employees of small businesses is often greater than that on employees of large companies, as they often receive smaller wage increases. Rengo's data shows that the average wage increase for small businesses this year is 4.45%.Makoto Ando stated that the Bank of Japan needs to closely monitor whether the current wage growth momentum will continue into next year, as economic uncertainty may have a negative impact on wage negotiations between management and labor unions.
Facing Multiple Economic Challenges
The Japanese government, burdened with high debt, is grappling with the challenge of balancing economic growth and fiscal health, and Shigeru Ishiba has made it clear that economic growth takes precedence.
Ishiba stated that he will continue to operate the economy and fiscal policy with the mindset that "only with economic growth can there be fiscal health," aiming to create a growth-oriented economy driven by wage increases and investment, and to improve fiscal conditions. Ishiba places great emphasis on local revitalization, saying, "We must use local revitalization as a catalyst for Japan's economic growth," among other things.
Some experts have said that the various economic stimulus measures proposed by Ishiba will require substantial financial support, which implies that taxes may be raised again in the future. Moreover, the allocation of fiscal funds can only solve temporary problems; a long-term sustainable economic policy is also needed.
There is also a viewpoint that Japan's low birth rate and aging population issue should be taken seriously. If productivity is not increased while ensuring a workforce, the economy and income will continue to deteriorate.
Paul Sheard, former Vice Chairman of S&P Global in the United States, pointed out that what is needed is an unprecedented structural reform, proactive corporate consolidation, effective utilization of mobile middle-aged and older workers, and bold yet prudent immigration management mechanisms.
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