Japanese basic wages accelerated in August, UBS: Companies remain optimistic about prices, next rate hike may be in December

Japanese basic wage growth accelerated in August, coupled with optimistic corporate outlook on prices, may support further rate hikes by the Bank of Japan. However, due to the new Prime Minister Fumio Kishida's dovish stance, the next rate hike may occur in December instead of October.

The latest data on Tuesday showed that full-time employees' basic wages grew by 2.9% year-on-year in August, up from 2.6% in July. However, actual wage growth declined by 0.6% year-on-year, compared to a 0.3% increase in July, mainly due to a slowdown in bonus growth.

Citi expects that with inflation easing, actual wage growth will turn positive again from September. It believes that starting from September, government subsidies for electricity and gas bills will slow down CPI inflation, thereby bringing actual wage growth back into positive territory.

Analysis suggests that the accelerated growth in Japanese basic wages may be gradually approaching a "virtuous cycle," where the relationship between higher wages and rising consumer confidence can support further rate hikes by the central bank.

Meanwhile, UBS survey data shows that Japanese companies remain optimistic about price increases, especially in consumer-facing industries, where pricing positions remain strong. The labor market remains tight, particularly in non-manufacturing sectors, with many companies responding by raising wages.

Overall, the likelihood of a rate hike in October is considered low. After meeting with Bank of Japan Governor Ueda, Fumio Kishida stated that there is no immediate need for further rate hikes, leading to a significant depreciation of the yen against the US dollar. Kishida later explained that his remarks were based on the central bank's belief that there is sufficient time to consider rate hikes. The summary of the September meeting released by the central bank also indicates that rate hikes are not urgent, with the next hike expected in December.

Next Rate Hike in December?

A UBS report last week pointed out that Japanese companies' optimism about price increases and the ongoing tight labor market support further rate hikes:

1. Companies continue to optimistically raise consumer prices, with inflation expectations and pricing positions remaining strong amid a stable business environment. Despite a decline in the corporate/consumer price index and a recent appreciation of the yen, output prices remain at historical highs, especially in the non-manufacturing sector, which seems encouraging.

Our pricing stance survey for consumer-facing industries (retail, personal services, catering) has a closer relationship with the CPI. Based on expected consumer industry output prices, which have only decreased by 1 percentage point to 33, they have generally remained at similar levels over the past nine quarters. This seems to confirm companies' optimism about price increases.

1. Companies are facing an intensifying labor shortage, reaching historically high levels. The latest survey shows an overall employment situation for companies at -36, the lowest reading since -46 in 1991. This week's labor survey shows an unemployment rate of 2.5%, down 0.2 percentage points from the previous month, at a historical low. Meanwhile, according to the survey, overall labor force and labor supply are still moderately expanding at an annual growth rate of 0.4-0.5% Despite this, the pace of labor supply is slower than before the epidemic (averaging about 1% in 2018-19), which is not enough to offset labor shortages. More companies are raising wages to ensure labor supply (see Figure 3). This indicates that as long as labor shortages persist, upward pressure on wages may continue.

UBS further pointed out that more information confirms that the possibility of a rate hike in October is very small, maintaining the basic forecast for the next rate hike in December. By the December meeting (December 19), the financial markets will have already experienced the U.S. and Japanese elections, and are more likely to calm down, providing a better environment for the Bank of Japan to raise rates. Communication by the Bank of Japan after the October meeting will be crucial and may signal a rate hike in December.

The new Prime Minister, Shizo Kato, who is widely seen as holding a hawkish stance on monetary policy, does not appear to be as hawkish as initially expected by the market. After meeting with Bank of Japan Governor Haruhiko Kuroda on October 2, he told the media, "I do not think we are in an environment that requires further rate hikes," triggering a sharp drop in the yen.

The day after making dovish comments, he explained that this was based on the Bank of Japan's view that it has sufficient time to consider potential interest rate changes. On the same day, the new Finance Minister, Taro Kato, also reiterated the independence of the Bank of Japan's monetary policy and pledged to communicate more cautiously with the market.

In addition, the Bank of Japan also released a summary of opinions from the September monetary policy meeting on October 1, once again confirming that a rate hike is not imminent, and the Bank of Japan has sufficient time to consider potential interest rate changes