The strong Japanese labour market, significant progress on wages, and accelerating core inflation, have helped push two-year JGB yields up to 0.62%. In a recent interview, Governor Ueda noted that the “staff estimate of [the] natural rate of interest… is ranging between around negative 1% and positive 0.5%.” With Japan’s real natural rate of interest likely to be at the upper end of this range, monetary policy remains too accommodative. The BoJ may once again surprise markets, with more rate hikes in 2025 than expected.
Wage gains are becoming entrenched. Rengo said last week that it will demand a pay increase of 6% or more for small and midsize companies in the shuntō annual spring wage negotiations next year. Prime Minister Shigeru Ishiba is piling pressure on companies to realize “significant salary hikes”. Japan’s average minimum hourly wage was lifted to 1,055 yen in October, a 5.1% y/y increase. But Prime Minister Ishiba has set a more ambitious target of raising the minimum wage to 1,500 yen by the end of the 2020s, which would require increases averaging 7.4% per year for five years straight.
Tokyo non-perishable food CPI inflation quickened to 4.00% in November, led by a 62.8% y/y surge in rice prices. Japan has emerged from its hottest summer to its biggest rice shortage in 30 years. With Japanese households spending an increasing share of their income on food, the recent acceleration in food inflation may have a stronger, more lasting impact on inflation expectations. Climate change, and the occurrence of more frequent, negative supply shocks, will mean more central banks, and governments, will be forced to pay closer attention to food price inflation in the coming years.
