Underlying wage growth continues to strengthen, keeping the BoJ firmly on track to pursue further policy normalisation. The y/y for contractual, scheduled cash earnings accelerated to 2.7% in July, the largest y/y increase since November 1992. Japan’s national weighted average minimum wage will jump by 5.1%, broadly matching the headline pay rise achieved at the spring wage offensive.
The jump in corporate profits suggests firms have the capacity to raise wages further. Ordinary profits surged to 19.7% of GDP in Q2, a record. Operating profits also climbed to a fresh high of 14.5% of GDP in Q2.
Japan has reached an inflexion point and is on a path to structurally higher interest rates. The BoJ’s monetary policy stance will eventually need to reflect this new reality. The yen has been strengthening, but it has further room to run. The policy rate is still a long way from neutral, which is certainly above 1%, and closer to 1.5%-2.0%.
The current account numbers should also contribute to a stronger yen. Ex-mineral fuel, the current account surplus widened to a record Y51.447tr in the twelve months to July, on the back of a surge in the primary income surplus to Y37.566tr.
