It is tempting to suggest that the BoJ caved in response to the stock market slump on Monday last week. Shinichi Uchida, Deputy Governor of the BoJ, said in his speech last Wednesday, that “the Bank will not raise its policy interest rate when financial and capital markets are unstable”. This was seen by some as a new BoJ put. But the reality of developments in prices and wages suggest the fundamentals for a stronger yen remain firmly in place. Monetary policy normalisation is only getting just getting started, with the real short-term interest rate still deeply negative.
Contractual, scheduled cash earnings rose 2.3% y/y in June, the strongest rate of increase since October 1994. Contractual cash earnings growth should continue to accelerate, with the results of the spring wage offensive yet to be fully absorbed in the data. The recently proposed minimum wage hike for fiscal 2024 (+5.0% y/y), alongside new recommendations for public sector pay, suggest wage pressures are broadening. The labour force participation rate for 15-64 years hit 81.62% in June, a record high, as the available pool of workers on the sidelines dwindles.
For the record, the separate wage income of employees data, published by the Cabinet Office on Friday, were even stronger than the headline cash earnings data, up 6.1% y/y in June. In seasonally-adjusted terms, this measure of wages surged by an annualised 9.2% q/q in Q2. This surely exaggerates the degree of wage pressures in the economy and need to be taken with a pinch of salt. But there is little doubt that Japan has reached an inflexion point and is on a path to structurally higher real interest rates. The BoJ’s monetary policy stance will eventually need to reflect this new reality. As a result, the yen has further room to strengthen from here.
