The case for a more hawkish BoJ policy continues to build. Headline cash earnings jumped 4.8% y/y in nominal terms in December (led by bonuses) but the y/y for contractual, scheduled cash earnings (base pay) also firmed to 2.7%, the largest annual increase since November 1992. Nominal wage income of employees, published by the Cabinet Office, surged by even more (+7.1% y/y): employment growth was very strong in Q4 (+400k).
Not that long ago, it seemed inconceivable that the neutral rate in Japan could be above 1%, let alone 1.5-2.0%. But this view is attracting growing support within the BoJ. More and more BoJ policymakers are beginning to challenge the narrative that the output gap remains negative, increasingly acknowledging the role that labour shortages and a lack of supply capacity are having in pushing up prices.
The latest acceleration in Tokyo food price inflation in Japan, is indicative of the type of negative supply shock that will become more frequent as the planet warms, and extreme heat, storms and floods intensify in the coming years. Headline Tokyo CPI inflation quickened from 3.10% to 3.38% in January, as a result. The BoJ will find it increasingly difficult to look past so-called ‘transitory’ price shocks (such as the recent food price spikes).
