Japan’s Prime Minister Fumio Kishida announced last week that he will be stepping down in September, amid record-low approval ratings. His three-year premiership has been dogged by political scandals. Public dissatisfaction had been rising too, with wages failing to keep pace with inflation, exacerbated by the yen’s weakness. Ironically, Kishida’s departure comes at just the time, when real wages are finally beginning to turn up. From the Q2 GDP report, compensation of employees rose 3.8% y/y in nominal terms, and 0.8% y/y in real terms.
The consumption deflator (excluding imputed rent) increased 2.9% y/y in Q2, according to the GDP report. But cost pressures have been broadening across the economy. The GFCF deflator, for example, climbed 3.7% y/y in Q2. According to the June 2024 Tankan survey, price pressures were forecast to intensify again in the non-manufacturing sector in Q3. The forecast employment diffusion index from the June Tankan survey also fell to a new multi-decade low (a lower number implies a tighter labour market).
The BoJ is still in the early stages of a tightening cycle, while the Fed is cutting. This is rare. This should ultimately be supportive of the yen but the mispricing in JGBs is arguably starker. The BoJ will be more hawkish than markets currently anticipate. The two-year JGB yield is still just 0.37%. This looks completely out of sync with where Japanese monetary policy is headed.
