By Leika Kihara
TOKYO (Multibagger) - In a report later this month, the Bank of Japan is set to showcase the increasing trend of wage hikes spreading across companies, particularly at smaller firms. This development is seen as a pivotal step towards a potential near-term interest rate hike, according to sources familiar with the central bank's plans.
The upcoming report, to be included in a quarterly analysis of regional Japanese economies, will draw upon surveys and feedback gathered by the BOJ's branch offices nationwide. The main report and an accompanying annex are expected to underline the growing number of small and midsize companies that are raising salaries, signaling a broader trend of wage increases necessary for a potential interest rate adjustment.
These findings will be closely examined by the BOJ at its upcoming policy-setting meeting on July 30-31, where the board will release updated growth and inflation projections for the quarter.
The central bank's regional report is scheduled for release on Monday, coinciding with a quarterly meeting of branch managers in Tokyo. The annex, focusing on wage trends, will be published at a later date, as per insider sources.
Earlier this year, the BOJ ended its eight-year-long era of negative interest rates, citing the expectation of sustained inflation around the 2% target due to rising wages. Core consumer prices in May rose by 2.5% year-on-year, surpassing the BOJ's target for over two years.
BOJ Governor Kazuo Ueda has hinted at the possibility of further rate hikes if wage increases continue to broaden and prompt companies to adjust service prices, thereby driving underlying inflation towards the 2% mark.
While many market participants anticipate a rate hike from the current near-zero levels this year, opinions are divided on the timing—whether it will occur this month or at a later date.
A recent survey by Japan's largest union Rengo revealed that companies offered an average pay hike of 5.10% this year, marking the most significant increase in three decades. However, smaller firms lagged behind with a 4.45% raise, compared to a 5.19% increase by larger counterparts. The uncertainty remains around the capacity of much smaller firms, not covered in the Rengo survey, to raise salaries.
The BOJ's extensive network of branches, facilitating regular interactions with local business leaders, enables the central bank to assess the extent to which wage hikes are permeating among small regional enterprises.
Given that around 70% of Japanese workers are employed by small and medium enterprises (SMEs), the wage movements in this sector play a crucial role in determining whether inflation will consistently hit the BOJ's 2% target.
Analysis:
The Bank of Japan's upcoming report highlighting the broadening trend of wage hikes among small firms indicates a positive economic outlook. As companies increase salaries, consumer spending is likely to rise, stimulating economic growth. This development also sets the stage for a potential interest rate hike, which can impact various financial instruments such as loans, savings accounts, and investments. Individuals should closely monitor these developments as they could have implications for their personal finances, including borrowing costs and investment returns.