Wage inflation in Japan

There is evidence that nominal wages in Japan are finally starting to rise:

Toyota Motor Corp. met its labor union’s demands for increases in salary and bonuses in full for the fourth straight year, in another sign that a sustainable wage-price cycle may be taking hold in Japan’s economy as the central bank considers the timing of a long-awaited interest rate hike.

The yen rose and government bond futures fell — signs traders were adding to bets on an imminent move by the Bank of Japan . . .

Economists expect the results of negotiations between companies and unions to point to stronger wage growth than last year. That should clear the path for the BOJ to end the world’s last negative interest rate regime by April, according to a majority of economists in a Bloomberg survey.

While the media focuses on price inflation in places like Japan (too low) and the US (too high) the real issue has always been wage inflation. Is Japan’s wage inflation sustainable? I don’t know. If I were the BOJ, I’d be in no rush to tighten policy. (Recall the mistakes of 2001 and 2006.)

The same picture works if you replace wage inflation with NGDP growth.



12 Responses to “Wage inflation in Japan”

  1. Gravatar of Jeff Jeff
    14. March 2024 at 07:28

    I posted this question on a thread below but bumping it here to see if you have any thoughts.

    I learned on this blog two years ago the hypothesis that monetary policy operates largely through housing. I understood this to mean that the interest rate either incentivizes or deters people from using their savings (or taking out loans) to buy or build housing.

    Doesn’t this suggest that the relevant inflation rate for determining whether policy is stimulating or restrictive is the housing CPI, not the overall CPI? If housing is inflating at 6%, then a 5.5% policy rate is still going to incentivize someone who has been saving up to buy a house to plow their cash into the housing market. Perhaps mortgages might be a little less appealing, if they are above 6% (currently they are only above that by a tiny amount). But, if the housing hypothesis is true, why do FOMC members keep talking about how restrictive their policy rate is?

  2. Gravatar of ssumner ssumner
    14. March 2024 at 07:40

    Jeff, You said:

    “I learned on this blog two years ago the hypothesis that monetary policy operates largely through housing.”

    That’s certainly not my view.

  3. Gravatar of Solon of the East Solon of the East
    14. March 2024 at 15:45

    Interesting post. Various high government officials and the Bank of Japan have been pressuring large employers to raise wages. I cannot tell if this is the market at work or not.

    One almost never sees Western orthodox macroeconomists discuss the Bank of Japan’s vast holdings of Japanese sovereign bonds—moreover I do not think the Bank of Japan plans to reduce its balance sheet.

    An interesting topic is whether the Federal Reserve should also just hold on to its balance sheet. However, the Federal Reserve appears determined to leverage up taxpayers again, even if the influence on inflation is minimal.

  4. Gravatar of Matthias Matthias
    14. March 2024 at 20:30

    Jeff, I suggest you go and read through some of the old entries in the blog (and Scott’s writing on EconLog). That will probably clear up your confusion.

    If (and that’s a big if) monetary policy would be mostly about interest rates, then mortgages for housing would indeed be a reasonable transmission mechanism.

    But that’s not really he case. Scott argued in a lot of places that interest rates are fairly misleading and more of a secondary effect than a cause.

    It’s a bit confusinf that most popular and even academic writing on monetary policy focusses so much on interest rates.

    Perhaps have a look at Singapore, here our central bank conducts monetary policy via the exchange rate (buying or selling Singapore dollar for (mostly) American dollars), instead of buying and selling local government bonds to influence their yield.

  5. Gravatar of dtoh dtoh
    15. March 2024 at 19:54

    I don’t think rising nominal wages helps much in Japan. They help when sticky wages are depressing employment and real economic growth. But in Japan where real growth and employment are stuck at near zero levels because of structural problems in the economy, nominal wage increases are just nominal. Other than as talking points for politicians, they provide no real value.

  6. Gravatar of ssumner ssumner
    16. March 2024 at 14:05

    dtoh, Well, the BOJ does have a 2% inflation target, and they need rising wages to hit that target.

  7. Gravatar of dtoh dtoh
    16. March 2024 at 15:14

    Doesn’t matter if the target is 2% or 1% or 0% or 10%. They won’t be able to get consistent real growth above 0.5%.

    Let’s the politicians and policy makers pretend like they are doing something, but it’s meaningless.

  8. Gravatar of Mike M. Mike M.
    17. March 2024 at 22:49

    Agree that BOJ should err on the side of not raising rates too early and repeating the mistakes of 2000 and 2006 (the earlier one Ueda correctly dissented on at the time).

    However, regarding NIRP, negative rates in practice have tightened not loosened policy in Japan, and removing them does not constitute a tightening as long as BOJ does not go further.

  9. Gravatar of ssumner ssumner
    18. March 2024 at 06:12

    dtoh, Yes, but it would help a bit with the fiscal situation.

    Mike, I’m not so sure. In most countries that adopted negative rates, the currency depreciated on the announcement, indicating an expansionary effect. Why is Japan different?

    But in general, I agree that interest rates are not monetary policy, and negative rates don’t mean that money is easy.

  10. Gravatar of dtoh dtoh
    18. March 2024 at 13:40

    Not as much as you would expect because the duration of Japan’s debt it relatively long compared for example to the U.S.

    Also reallocating who owns the debt (either through inflation or other means) is always easy. Japan’s real problem is the amount of production and the allocation of that production.

  11. Gravatar of ssumner ssumner
    19. March 2024 at 15:58

    dtoh, Just the opposite. The long duration makes it help even more.

  12. Gravatar of dtoh dtoh
    20. March 2024 at 02:47

    You’re right.

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