World Economy

Wage Increase Key to Japan’s Inflation

Wage Increase Key to Japan’s Inflation Wage Increase Key to Japan’s Inflation

Japanese inflation will likely rise in the near future so long as oil prices don’t fall further, Bank of Japan board member Sayuri Shirai said, but higher wage growth remains key to reaching the central bank’s inflation goal.

Long-term inflation expectations in Japan are only about half the BOJ’s 2% inflation goal, Shirai noted in remarks prepared for delivery to the San Francisco Fed’s biannual conference on Asian economic policy, Reuters reported.

“This suggests a need to generate a further increase in inflation expectations in Japan,” she said.

Japanese households and financial institutions have gradually been taking on more “healthy” risk since the Bank of Japan began massive monetary easing in 2013, she said.

“It is important that the BOJ continue to support these positive developments by maintaining an accommodative monetary environment,” she said.

Households need to see consistent wage increases before they will tolerate rising prices, which would in turn help boost inflation toward the 2% target, said Shirai, a former IMF economist who is more pessimistic about price prospects than some others on the board.

But Japanese households, she said, generally expect higher inflation than what is actually experienced, as well as decline in future income.

“It will be important for the BOJ to promote public understanding that its objective is to achieve a moderate price rise associated with a wage hike and a sustainable increase in household spending, to improve households’ tolerance to price rises,” she said.

 Recovery Trend

Economics Minister Akira Amari said Japan’s economy remained in a recovery trend although weakness was observed in some areas.

Amari said he hoped discussions between the government and private sector kicking off later this month would spur corporate capital spending and help sustain a moderate economic recovery.

The minister made the remarks at a post-cabinet meeting news conference when asked about a surprise drop in machinery orders and other signs of weakness seen in the economy.

 BoJ Holds Course

The Bank of Japan kept monetary policy on hold despite the economy entering a technical recession as it continued to argue the recovery is on track.

Japan’s central bank said it will keep buying government bonds at a pace of ¥80 trillion  ($651 billion) a year in an effort to drive down long-term interest rates, even as it noted weakness in some measures of public inflation expectations.

The BoJ’s decision highlights a difference to its stance last year, when it eased policy to boost inflation expectations. Now the BoJ is signaling it will keep policy on hold as long as inflation is on course to eventually reach 2%.

The yen was stronger after the decision at ¥123.2 to the dollar while the Topix share index gave up some of its gains, trading up 0.7% at 1,598.

The BoJ decision came as Japan recorded an unexpected ¥111 billion trade surplus for October. Showing the boost to the economy from falling oil prices, the value of imports was down by 13.4% on a year ago.

But exports also fell 2.1% by value, despite the heavy depreciation of the yen, showing the impact of China’s slowdown on Japanese industry. Exports to China fell for the third consecutive month and were down by 3.6% on a year ago.

“Japan’s economy has continued to recover moderately, although exports and production have been affected by the slowdown in emerging economies,” said the BoJ’s policy board in its latest statement.

“Inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, although some indicators have recently shown relatively weak developments.”

Headline inflation is running close to zero because of weak oil prices. Excluding food and energy, prices are up by 0.9% on a year ago.

Haruhiko Kuroda, BoJ governor, has placed great weight on increasing public expectations of inflation in order to break the deflationary mindset brought about by 20 years of on-and-off falls in prices.