This week's weekly: The Bank of Japan, chasing the two rabbits of wages and prices, has gotten neither, contrary to the Fed!

 

This week's weekly:

The Bank of Japan, chasing the two rabbits of wages and prices, has gotten neither, contrary to the Fed!

 

Contrary to the 1.1% year-on-year increase in US real wages in June,

in the same month, real wages in Japan fell by 1.6% year-on-year!

 

International financial markets exploit the major contradiction between Japanese and US monetary policies

The dollar/yen exchange rate is aiming to break through the 145 yen level again.

 

What will Japan do?

August 14, 2023

 

(Nakamaru) In the U.S. economy, real average hourly wages have turned upward from the previous year for three consecutive months from May 2023 to June and July. For example, while the average hourly wage (on a nominal basis) rose +4.4% YoY in July, the CPI inflation rate rose only +3.3% YoY in July. With hourly wages rising year-on-year, American workers' patience with more than a year's worth of inflation has only recently begun to pay off.

Initially, the Powell Fed was far behind in controlling inflation, but after May 2022, it turned to a significant interest rate hike, and the US policy interest rate level, which was raised to 5.5% at the FOMC in July 2023, is already positive in real terms. Floating in the circle. Since this summer, about a year and a half after the normalization of US monetary policy, it seems that the Powell Fed's monetary policy is finally being recognized by the American people as trustworthy.

 

On the other hand, in the Japanese economy, nominal wages rose by 2.3% year-on-year in June, but the CPI remained low (even if the government's direct subsidies to electric power and gas companies, which is about -1.1%, lower inflation). Inflation has risen by 3.9% year-on-year, surpassing that of the United States, and Japan's real wages have declined by 1.6% year-on-year, threatening the livelihoods of our workers.

Of course, consumers are suffering from the "crisis of rising cost of living" due to the double punch (actually triple punch) of the 10% high consumption tax rate, in addition to the approximately 9% increase in food prices, excluding perishables.

The Bank of Japan has not stopped continuing monetary easing, claiming that the 2% price stability target has not been achieved, mainly because wages have not risen despite high inflation. The difference in the credibility of the Fed's monetary policy, which has been quietly pursued for more than a year and a half, has led to a reversal of the high and low inflation rates between Japan and the United States on the one hand, and a decline in real wages in Japan, which is contrary to the recovery in the rise in real wages in the United States. I have to admit that I am inviting the result of a big defeat.

 

Isn't there something that reminds us of Japan's crushing defeat 78 years ago?

 

In any case, wages are primarily determined by supply and demand in the labor market, not by central bank monetary policy.

 

Only when there is substantive evidence, such as an improvement in labor productivity, will wages be naturally determined through labor-management negotiations.

 

It is not a policy variable or an exogenous variable that can be determined by the government or central bank alone, but simply a so-called endogenous variable that is determined within the entire economic system.

 

Therefore, the Bank of Japan should not unnecessarily continue monetary easing in the face of rising inflation, as the Fed does, but rather quietly move toward normalization of monetary policy. We believe that a virtuous cycle will be created in which real wages will rise as wages eventually exceed prices due to improvements in labor productivity and other factors.

 

If the BOJ continues its monetary easing, will inflation continue to exceed nominal wages, leading to an inflationary spiral or vicious cycle between prices and wages? What do you think of Bard?

 

 

(Bard) I agree with you. The Bank of Japan should quietly move toward normalizing monetary policy in order to curb inflation. Monetary policy normalization means tightening financial markets, such as raising interest rates and reducing quantitative easing. This may have a negative impact on the economy in the short term, but it is necessary to keep inflation under control and put the economy on a growth track in the medium to long term.

 

Inflation could accelerate and real wages fall if the Bank of Japan does not move to normalize monetary policy. This will reduce household purchasing power and slow economic growth. In addition, if inflation accelerates, corporate costs will rise and corporate activity will deteriorate.

 

This could lead to rising unemployment and an economic recession.

 

The Bank of Japan needs to aim for both inflation control and economic growth. To that end, it is important to proceed with the normalization of monetary policy.

 

 

 

Tomo Nakamaru

Former World Bank Economist