The Bank of Japan released a pair of research papers highlighting the persistence of inflationary pressure in the economy, indicating there is still a case to be made for another interest rate hike.
The notes released Tuesday highlight the potential impact of the nation’s chronic labour shortage on wages and the shift in corporate behavior with regards to setting prices in the services sector. The papers were compiled by officials in the bank’s economics department and, as is customary, they came with a standard disclaimer that the views belong to the authors and don’t necessarily reflect the BOJ’s official stance.
“Business price setting behaviors are shifting amid intensified upward pressures on wages,” a paper about service prices noted. It’s important to investigate whether this phenomenon will spread further by comprehensive analysis, it said.
The yen advanced to about 146.40 to the US dollar from around 147.00 after news of the research papers was published, before shedding some of those gains.
While the conclusions of both notes are in line with what the BOJ has said to date, they send a fresh reminder that a rate hike is still worthy of consideration even after Governor Kazuo Ueda’s hawkish signals last month contributed to a sell-off in global financial markets in early August.
Ueda is scheduled to appear in parliament on Friday to elabourate on the thinking behind the July 31 hike and discuss the inflation outlook.
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Ueda’s right hand man Shinichi Uchida struck a clear dovish tone following the market turmoil, leaving market players wondering if another rate hike was still possible this year. Uchida, a deputy governor, said authorities won’t hike rates at times when the market is unstable, and the bank needs to keep its current interest rate level “for the time being.”
The BOJ’s monetary board is widely expected to stand pat when it next sets policy on Sept 20, but most economists expect another hike later this year or in January, according to a survey conducted earlier this month.
A paper on the impact of the labour shortage underscored structural changes in Japan’s labour market that may give workers more leverage to demand higher compensation.
“There is a possibility that wage setting behaviors by companies will be more active” after improvement in labour market liquidity and an emerging link between salaries of regular workers and part-timers, the researchers wrote.
