BOJ Policy Hinges on Developments in Next Round of Wage Talks

Economists and investors looking for catalysts to prompt the Bank of Japan to pare back stimulus are keeping a close eye on wage growth, a key factor cited by the central bank for achieving its goal of sustainable inflation.

(Bloomberg) — Economists and investors looking for catalysts to prompt the Bank of Japan to pare back stimulus are keeping a close eye on wage growth, a key factor cited by the central bank for achieving its goal of sustainable inflation.

While the country’s largest union federation secured the biggest pay increases in three decades this year, BOJ Governor Kazuo Ueda likely wants to see more evidence of lasting wage growth before he calls time on one of the world’s most ambitious monetary easing programs. 

Here’s a timeline of key events that may influence the pace of wage growth over the next year:

Oct. 19: Rengo Wage Target

The trade union federation Rengo typically unveils an outline of its strategy for the next round of spring wage negotiations in mid-October. This year it will release its basic plan including a broad goal for salary increases on Oct. 19.

These initial goals are usually very ambitious. Last year the organization proposed seeking a 5% total pay increase during the spring talks, up from a 4% target set in previous years. The 5% target included a 3% bump in base pay.

A continuation or escalation of this demand will indicate that from the labor side, existing upward pressure on wages will stay in place. Anything short of that would likely fuel caution at the central bank. 

Late October: Kishida Package

Prime Minister Fumio Kishida, who is also pushing for sustainable pay increases to improve income distribution, is likely considering an extension or enhancement of subsidies to companies that hike wages to maintain the momentum after this year’s strong gains. The premier ordered his team to compile economic measures by the end of the month. They will likely include provisions to support wage growth, especially at smaller companies.

Early December: Rengo Policy

Last year Rengo unveiled a detailed 29-page policy statement on Dec. 1 that formalized the 5% pay increase target. The document also touched on the need to address age-based pay discrepancies, gender equality and other workplace issues.

December-February: Big Firms’ Wage Plans, Deals

Major companies will begin announcing their plans for pay as early as December while local media are likely to survey firms on their intentions. These plans will help frame the forthcoming talks. Some results of negotiations are likely to start emerging in the first months of the year.

Last December, Nippon Life was among insurance companies unveiling plans for big raises, with the company eyeing gains of 7% for its sales force. Uniqlo operator Fast Retailing Co. said in early January that it would raise salaries by up to 40%, encouraging others to follow suit. Auto giants Toyota Motor Corp. and Honda Motor Co. announced the deals they reached with staff toward the end of February.

Early March: Average Pay Demands 

In early March, Rengo will likely tally the pay requests of its member unions. On March 3, the federation disclosed that 2,614 unions had demanded an average total pay increase of 4.49%, marking the first time in 25 years that the request exceeded 4%.

Mid March: Pay Deals

About two weeks later, Rengo creates an initial tally of results. On March 17 this year, the federation announced that 805 unions had secured a record 3.80% wage increase. Rengo updates the results several times through the summer, with the pace of wage growth typically tapering off in later tallies as more firms share their results.

April: Smaller firms

While the first tallies in March tend to reflect outcomes at larger corporations, more results for smaller firms and part-time workers become available starting in April. Last year, as many as 2,000 companies with fewer than 300 workers reported their pay deals by around April 13, up from 398 in the first tally. 

About two-thirds of Japan’s company employees work at ventures with fewer than 1,000 staff, so the April figures are an important indication of the broader wage growth trend. Results for part-time and temporary workers also start to get factored into Rengo’s tally in April. Almost 37% of Japanese workers are contract, part-time or temporary staff.

July: Final Tally

Rengo usually releases its final tally in July. Rengo said on July 5 that its members secured pay increases of 3.58%.

Some of the gains had already begun showing up in pay-slips from May. By mid-August, more than 80% of the increases were expected to be reflected in payroll data, according to a BOJ report.

August: Minimum Wage

Separately, the government asks prefectures to consider raising the minimum wage around mid-August. Japan’s minimum wage has been relatively stagnant and is considerably lower than those in other developed countries. 

Kishida aims to raise the nation’s minimum wage to ¥1,500 ($10) by the mid-2030s, an increase that implies annual gains of around 3.5%, another potential impetus to drive up pay.

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