BANK of Japan (BOJ) governor Haruhiko Kuroda said on Monday (Nov 14) the central bank would stick to monetary easing to support the economy for the present in order to achieve sustainable and stable inflation accompanied by wage growth.
Wage inflation, which has long lagged policymakers expectations, is set to again take centre stage during pay talks next spring and should determine how successful Japan would be in spurring a virtuous cycle of demand-led economic and price growth.
Kuroda said the job market is expected to tighten, particularly at service sector firms, many of which employ low-paid part timers and contract workers.
As wage increases spread gradually to permanent workers at small firms, a tight labour market could prompt a shift of workers towards highly productive sectors, the BOJ chief said.
The annual labour-management wage negotiations next spring will likely take into account both the tightening of the job market and rising inflation, he added.
"We are at a stage where we will continue monetary easing to firmly back economic activity at present," Kuroda told a meeting with business leaders in Nagoya. "This will help companies lay ground for wage hikes as we are aiming to achieve sustainable and stable achievement of our price stability goal accompanied by pay increase."
Atsushi Takeda, chief economist at Itochu Economic Research Institute, said that next year's wage talks could achieve a 3 per cent increase from this year's 2 per cent, although that would be short of 5 per cent demanded by the Rengo federation of labour unions.
"The wages hold the key to see whether sustainable inflation take hold. In that sense, tightening of the labour market may be an encouraging signal to Governor Kuroda," Takeda said.
Unlike the United States and Europe - which are tightening monetary policy to combat rising inflation - Japan is still only halfway to recovery from impact of the Covid-19 pandemic, with the output gap remaining in negative territory, Kuroda said.
The BOJ maintained ultra-low interest rates at its last policy meeting in October, keeping its dovish guidance intact.
Kuroda said Japan's consumer inflation would accelerate to around 3 per cent this fiscal year but slow to around 1.5 per cent next year as global commodity prices decline, reducing cost-push inflationary pressures from import costs.
He said, however, that there remained a large element of uncertainty over the outlook for Japan's economy, currency moves, global commodity markets and other price pressures.
Japanese firms have long been wary about raising prices but were now making broad increases, he added.
"We must pay attention to the price-setting mechanism at companies," Kuroda said. REUTERS