Prime Minister Fumio Kishida on Monday urged Japanese firms to raise pay at a faster pace in 2024 than this year, before the start of annual wage negotiations that would sway the Bank of Japan's monetary policy.
In a joint appearance with Kishida at an event organized by the country's powerful business lobby, BOJ Governor Kazuo Ueda said the likelihood of attaining the central bank's 2 percent inflation target is "gradually rising" and the outcome of the so-called shunto spring wage talks between management and labor unions holds "the key."
Financial markets expect the BOJ to end its negative interest rate policy early next year, as the country's headline inflation has stayed above 2 percent for 20 months through November.
The Japanese central bank has said the inflation trend after the effects of surging energy and raw material costs wane is more important, bringing into focus the sustainability of wage hikes.
"I strongly ask everyone in the business community to accelerate domestic investment and, above anything else, to achieve wage growth that will exceed this year's," Kishida told the gathering.
Japan has long been struggling with chronic deflation, which led to the BOJ to introduce unprecedented monetary easing programs, as well as low pay and low growth, but the "the tide is clearly changing," he said.
The prime minister said ordinary people should be able to feel wages are rising, adding that the government will make sure their disposable incomes will increase through a 40,000 yen ($281) tax cut that will be implemented in June and other policy measures.
It has become customary for the prime minister to attend a meeting of Keidanren, formally known as the Japan Business Federation, to seek wage hikes. Kishida did not give a numerical target on Monday.
The comments made by Kishida and Ueda reflect how the ball is now in the court of Japanese firms, which have been passing on higher costs to consumers.
For the fiscal 2023 shunto wage negotiations, the average pay hike at major firms stood at 3.99 percent and at smaller firms 3.00 percent, both the highest in about 30 years.
Expectations have been heightening that the upward momentum will continue as inflation remains elevated and amid record profits made by Japanese firms, particularly those that have benefited from a weaker yen against the U.S. dollar. Still, small and midsize firms find themselves in a much more difficult situation, having been unable to raise prices.
In the event that took place a week after the BOJ left its ultralow rate policy unchanged, Ueda justified his bank's persistence with monetary easing because uncertainty remains over the price and wage outlook despite some recent positive developments.
"In order for the economy to see a sustained recovery led by domestic demand and for the virtuous cycle between wages and prices to intensify, it is essential that the increase in corporate profits lead to improvement in household income," Ueda said.
Private consumption received a boost from pent-up demand for services following the COVID-19 pandemic. But with inflation lasting longer, rising prices of everyday goods have begun to weigh on consumers, as wage growth has consistently been negative when inflation is taken into consideration.
For his part, Keidanren chief Masakazu Tokura emphasized the necessity of joining forces with the government to emerge completely from deflation. Member firms need to go for pay hikes "with more energy and stronger determination" than this year, he said.
Before the BOJ's policy-setting meeting last week, Tokura called for the central bank to start normalizing policy "as soon as possible."
Ueda said on Monday the central bank will consider changing its monetary policy when a virtuous wage-price hike cycle is in motion and the likelihood of attaining 2 percent inflation stably and sustainably "rises sufficiently."
"Given the uncertainties surrounding economies and financial markets at home and abroad, the timing of a policy change is yet to be decided," he said, adding that the BOJ will make its policy decision appropriately by monitoring future developments.
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