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BOJ may tweak yield control this year if wage hikes broaden - ex-central bank official

Published 01/13/2023, 01:29 AM
Updated 01/13/2023, 01:30 AM
© Reuters. FILE PHOTO: A man walks past Bank of Japan's headquarters in Tokyo, Japan, June 17, 2022. REUTERS/Kim Kyung-Hoon

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) - The Bank of Japan (BOJ) could tweak its yield control policy to dial back monetary stimulus this year if wage hikes spread beyond big firms, making it likely that higher pay will become a sustained trend, its former top economist Seisaku Kameda said.

A growing number of big companies, including Uniqlo parent Fast Retailing, are pledging to raise pay as intensifying labour shortages and rising living costs force them to shift away from their decades-long custom of keeping prices and wages low.

While top firms are likely to offer significant pay rises at this year's annual "shunto" spring wage talks with unions, the key is whether smaller firms would follow suit, Kameda told Reuters in an interview on Friday.

The BOJ will likely scrutinise various data, such as the government's monthly wage data and union umbrella's surveys, later this year to gauge whether wage hikes have broadened enough to become sustained next year and beyond, he said.

"Judging from its communication, the BOJ appears to think that once wage hikes kick off this year, the trend toward higher pay will be sustained," said Kameda, who has deep knowledge on how the BOJ produces economic forecasts, and formulates them into a policy narrative.

"If it sees enough evidence that wage hikes are broadening, the BOJ can say its stimulus has worked. It's possible, then, for the BOJ to point to higher wages in justifying a tweak to its policy framework," he said.

In a quarterly outlook report due at next week's policy meeting, the BOJ may slightly revise up its inflation forecasts for the fiscal year beginning in April as companies continue to pass on higher costs for a wide range of goods, Kameda said.

But a lack of wage data means the BOJ will wait until a subsequent quarterly report in April to better reflect its assessment on whether pay rises will be sustained, he said.

The April report will be released at a policy meeting on April 28, the first one to be held under a new BOJ governor who succeeds Haruhiko Kuroda whose term ends on April 8.

Markets are rife with speculation the BOJ will soon abandon its yield curve control (YCC) policy and start raising interest rates, a view fuelled by its abrupt decision last month to widen the band around its 10-year yield target.

Kuroda has dismissed the chance of a near-term rate hike, arguing that the BOJ must keep monetary policy ultra-loose until wages rise more, and change the current cost-driven inflation into one backed by robust domestic demand.

Kameda, however, said recent comments by BOJ executives, including those by Kuroda, suggest the BOJ now sees cost-push inflation in a more positive light than in the past.

© Reuters. FILE PHOTO: A man walks past Bank of Japan's headquarters in Tokyo, Japan, June 17, 2022. REUTERS/Kim Kyung-Hoon

"It's true inflation has been driven mostly by cost-push factors. But it's also true that companies were able to pass on the higher cost to consumers because the economy was strong," Kameda said. "That's an unprecedented change in Japan."

Having headed the BOJ's research and statistics department until 2022, Kameda now serves as an economist at a think tank affiliated with Japan's Sompo holdings.

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