ACHIEVING A VIRTUOUS WAGE-PRICE CYCLE IS ANYTHING BUT A FOREGONE CONCLUSION...


But FX markets are all about prospective rate differentials, whether nominal or real, which in Japan’s case means that the success of its exit operation will wither on the vine if what follows is less convincing. Given that the BoJ’s initially rather tentative commitment to further rate hikes, and the Fed above all pushing back on its rate cut timeline in the meantime, the JPY has remained both the carry trade currency of choice, and as importantly Japanese investors and corporates remain reticent to repatriate profits on foreign investments and operations.


As is well known, the BoJ is in practice rather less independent than other central banks are in theory and cooperates closely with the Ministry of Finance (MoF) in setting monetary policy. There is little doubt that the shift in BoJ rhetoric from its initial caution express greater confidence that the sharp rise in wage settlements at large companies (which only constitute ca. 15% of employees) will help to ensure a ‘virtuous wage-price cycle that should see CPI around target, and per se open the door to further modest rate hikes, and very gradual balance sheet reduction.


Achieving a virtuous wage-price cycle is anything but a foregone conclusion. For instance, Japanese SMEs will be wary of reaching similarly high wage settlements, given higher input costs (in no small part due to a weak JPY) and higher interest rates, and bearing in mind that 17% of corporate Japan are zombies, i.e. revenues are not sufficient to cover debt servicing costs, so even the smallest of rises in yields could well push a number of those companies into bankruptcy. The BoJ is not unreasonably assuming that higher wage settlements will break the recent very weak cycle in Household Consumption, that has contracted for four consecutive quarters, but some of that weakness may be a function of a fairly rapidly ageing demographic. Japan’s resistance to allowing greater inward migration to ease labour shortages is well documented, and while it has over the past decade achieved a good deal of success in raising female labour force participation from 48% to 55%, this has been largely in lower skilled posts. As such the demographic challenge to future growth prospects remains very real.


17 | ADMISI - The Ghost In The Machine | Q2 Edition 2024


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