The Bank of Japan (BOJ) has reported a labor shortage is pushing smaller firms to increase wages and raise prices. This signifies confidence in Japan’s progress towards achieving its 2 percent inflation target permanently.
This optimistic assessment, reached during a meeting of regional branch managers, might strengthen the argument for the central bank to raise interest rates at its next meeting on July 30-31.
“Many regions reported that the significant wage increases negotiated by large companies this year have spread to small and medium-sized companies,” the BOJ’s quarterly meeting summary stated.
This assessment contrasts with the previous meeting in April, where the BOJ mentioned “hopeful signs” of strong wage increases among large companies spreading to smaller firms. The bank noted that some smaller regional firms had prioritized wage increases to retain or attract workers, despite not having enough profits to offset the higher costs.
Many regions also observed companies passing on higher costs, or considering doing so, particularly in the service sector, the BOJ reported. Consumption remained “strong overall,” driven by strong spending by inbound tourists offsetting weak household consumption due to rising living expenses.
The central bank’s stance on wage developments will be among the key factors its board will consider at its policy meeting this month to determine interest rates, as well as new quarterly growth and inflation forecasts. Japanese workers witnessed a 2.5 percent rise in their average basic wages in May, the fastest increase in 31 years, with part-time workers experiencing particularly strong gains, government data revealed earlier Monday.
Separately, the Japanese Ministry of Finance announced a current account surplus in May, amounting to 2.849 trillion yen ($17.74 billion). Analysts had predicted a surplus of 2.07 trillion yen, following a surplus of 2.52 trillion yen in April.
Japan’s imports climbed 9.3 percent to 9.241 trillion yen in May, while exports rose 12.1 percent to 8.132 trillion yen, leaving Japan with a trade deficit of 1.107 trillion yen. Meanwhile, the capital account recorded a deficit of 11.7 billion yen, while the financial account recorded a surplus of 1.258 trillion yen in May.
In the markets, Japan’s Nikkei index retreated from a record level it reached during Monday’s trading, pressured by investors taking profits following a prolonged stock market rise.
The Nikkei average peaked at a record high of 41,112.24 during volatile trading, but closed down 0.32 percent at 40,780.70. The broader Topix index fell 0.57 percent to 2,867.61.
Market sentiment, initially boosted by strong performance from Wall Street’s main indexes on Friday following weaker-than-expected U.S. jobs data fueled expectations of an interest rate cut as early as September, waned.
Some Japanese technology stocks followed gains in their U.S. counterparts, bolstering the Nikkei. Investors aimed to book profits following Japan’s main stock indexes experienced five consecutive days of gains, reaching record highs during last week’s trading session.
Out of the 225 stocks listed on the Nikkei, only 53 rose, while 171 fell.
Electrical equipment maker Yaskawa Electric Co. declined 4.4 percent, one of the worst performers on the percentage index, following reporting disappointing earnings results. Chip-making equipment giant Tokyo Electron Co. fell 0.9 percent.
In contrast, SoftBank Group Corp rose 0.4 percent following U.S.-listed shares in British chip designer Arm Inc. hit an all-time high. Japan’s SoftBank Group Corp. owns a 90 percent stake in Arm. Fast Retailing, owner of clothing brand Uniqlo, rose 0.4 percent.
Bank of Japan Sees Wage Growth Spreading, Boosting Inflation Outlook
The Bank of Japan (BOJ) has expressed optimism that wage growth is spreading to smaller firms, indicating progress towards achieving its 2% inflation target. The central bank believes that a labor shortage is driving smaller companies to raise wages and pass on higher costs through price increases. This assessment comes from the summary of discussions at the BOJ’s regional branch managers meeting and might strengthen the case for an interest rate hike at the next monetary policy meeting on July 30-31.
Wages Rising Across the Board
The BOJ’s quarterly meeting summary stated that many regions reported that the large wage increases implemented by major companies in wage negotiations this year have trickled down to small and medium-sized enterprises (SMEs). This optimistic outlook contrasts with the previous meeting in April, where the BOJ had only observed “hopeful signs” of wage increases spreading to smaller firms. The latest report suggests that some smaller regional firms are prioritizing wage increases to retain or attract employees, even if their profit margins are not sufficient to offset the higher costs.
Price Increases on the Horizon
The BOJ also noted that many regions are witnessing companies passing on higher costs to consumers, particularly in the service sector. This trend is further supported by the robust spending by inbound tourists, which is offsetting weak consumption among households struggling with rising living costs. The central bank’s observations suggest that the Japanese economy is experiencing a positive cycle of rising wages and consumer prices, a key driver of its inflation target.
Key Factors for Interest Rate Decision
The BOJ’s assessment of wage developments will play a crucial role in its upcoming monetary policy meeting in July. The central bank will also examine new quarterly growth and inflation forecasts to determine the appropriate level of interest rates. Recent government data revealed that Japanese workers’ average basic wages rose by 2.5% in May, the fastest pace in 31 years, with part-time workers seeing particularly strong gains. This positive wage growth further strengthens the case for a potential interest rate increase.
Current Account Surplus and Trade Deficit
Japan’s Ministry of Finance reported a current account surplus in May, amounting to 2.849 trillion yen ($17.74 billion), exceeding analyst expectations. While exports rose by 12.1% to 8.132 trillion yen, imports also increased by 9.3% to 9.241 trillion yen, resulting in a trade deficit of 1.107 trillion yen. The capital account recorded a deficit of 11.7 billion yen, while the financial account registered a surplus of 1.258 trillion yen.
Nikkei Retreats from Record High
Japan’s Nikkei index, following reaching a record high during Monday’s trading, pulled back from its peak as investors booked profits following a period of sustained stock market gains. The Nikkei average closed down 0.32% at 40,780.70, while the broader Topix index fell 0.57% to 2,867.61. The initial market bullish sentiment was fueled by a strong performance by Wall Street’s main indexes on Friday, as weaker-than-expected U.S. jobs data boosted hopes of an interest rate cut in September.
Technology Stocks Track Gains in U.S. Market
Some Japanese technology stocks mirrored gains in their U.S. counterparts, contributing to the Nikkei’s overall performance. However, investors opted to take profits following Japan’s main stock indexes had experienced five consecutive days of gains, culminating in record highs last week. Out of the 225 stocks listed on the Nikkei, only 53 rose, while 171 declined.
Company Performance Highlights
Electrical equipment manufacturer Yaskawa Electric Co. was one of the worst performers on the day, dropping 4.4% following releasing disappointing earnings results. Chip-making equipment giant Tokyo Electron Co. also faced losses, falling by 0.9%. In contrast, SoftBank Group Corp. rose 0.4% following an all-time high for U.S.-listed shares in British chip designer Arm Inc., in which SoftBank Group Corp. holds a 90% stake. Fast Retailing, the owner of clothing brand Uniqlo, gained 0.4%.
In conclusion, the BOJ’s optimistic outlook on wage growth and its potential impact on inflation suggests positive momentum for the Japanese economy. The central bank’s upcoming monetary policy meeting will provide further insights into its plans for interest rates, while the Nikkei’s recent retreat from its record high reflects the market’s cautious profit-taking following a period of strong gains.
