Comments by Bank of Japan Governor Kazuo Ueda

By Howard Schneider and Leika Kihara

JACKSON HOLE, Wyoming (Reuters) – Bank of Japan Governor Kazuo Ueda expressed optimism about wage hikes spreading beyond large firms and potentially accelerating due to a tightening job market. This indicates a favorable scenario for interest rate hikes.

Ueda’s comments may strengthen expectations that the central bank will restart its rate hike cycle, previously paused due to concerns over U.S. tariffs affecting Japan’s export-driven economy, later this year.

Despite a declining working-age population, wage growth in Japan has stagnated for decades due to “entrenched deflationary expectations” that deterred companies from raising prices and wages. However, Ueda noted that wages are now increasing, with labor shortages presenting a significant economic challenge. Global inflation stemming from the COVID-19 pandemic has disrupted Japan’s deflationary state.

“Notably, wage growth is spreading from large enterprises to small and medium enterprises,” Ueda mentioned. He indicated that unless there’s a major negative demand shock, the labor market is likely to remain tight, exerting upward pressure on wages.

Ueda participated in a panel alongside Bank of England Governor Andrew Bailey and European Central Bank President Christine Lagarde, focusing on labor market challenges facing their economies.

Japan has experienced three consecutive years of substantial wage increases resulting from annual spring wage negotiations between companies and labor unions. Labor mobility has also increased, as young people seek better-paying positions, prompting competitive wage increases among employers.

In summary, demographic shifts since the 1980s are now leading to acute labor shortages and consistent upward pressure on wages, according to Ueda. These shifts are creating significant adjustments to the economy’s supply side through higher participation, increased mobility, and capital-labor substitution.

Ueda emphasized that these dynamics will affect the relationship among labor market conditions, wages, and prices. He stated, “We will continue to monitor these developments closely and incorporate our assessment of evolving supply-side conditions into the conduct of monetary policy.”

After exiting a prolonged stimulus last year, the Bank of Japan raised interest rates to 0.5% in January, believing Japan was on the verge of achieving its 2% inflation target. The BOJ held rates steady in July but revised its inflation forecasts upward, maintaining hopes for a rate hike this year.

Despite consumer inflation surpassing the BOJ’s target for over three years, Ueda is cautious about increasing rates as underlying inflation remains below the 2% mark. Nonetheless, persistent food inflation and prospects for sustained wage growth have prompted concerns that could lead to additional rate hikes, as indicated by the July meeting summary.

Nearly two-thirds of economists surveyed by Reuters in August anticipate the BOJ will raise its key interest rate by at least 25 basis points later this year, a rise from the previous month’s projections.