Yesterday, the Bank of Japan raised its policy target interest rate for the first time in 17 years, causing commentators to talk – “They finally gave in to the pressure of financial markets”, “Significant tightening”, “Abolition of radical policies”, etc. – all hysteria. The reality was much different as they adjusted their target from -0.1% to 0% – no major shift, just a modest change after better than expected – ivy This may finally signal that the deflationary mentality among workers and businesses is coming to an end. However, the idea that the Bank of Japan has just completely changed its attitude is naive and untrue. After analyzing the situation in Japan, we have some great music today – because it's Wednesday.
Bank of Japan adjusts slightly
Japan's unions are organized by enterprise rather than sector, which often makes it difficult to coordinate workers' pay outcomes.
The trade union movement's top body tackled the problem as early as 1954, when it proposed coordinating annual wage increases for most workers and businesses.
The so-called “spring wage offensive” or— ivy – Held every February and March, it is a source of stability for Japan’s industrial relations system.
This article is from the Japan Economic Research Center – The history of spring knives and their economic significance (October 17, 2023) – There is a wealth of information on the process if you are interested in learning more.
While negotiations started with larger unions in large enterprises, they eventually trickled down to small and medium-sized enterprises, which do not have strong union structures and make up the majority of the workforce.
Since the housing crash of 1991, unions have lost their protections and their ability to reap wage increases has declined.
Until recently, unions have been at a disadvantage.
However, with the support of the government in recent years, the unions have seen greater success and the compliance process has regained its effectiveness as the only way out of a deflationary mentality is through stronger wage outcomes.
Below are the average annual results since 1956 (percentage increase each year).
After the chaos caused by the OPEC oil price rise in the 1970s, nominal wage outcomes became very modest in the 1990s after the housing bubble burst in 1991.
In recent years, rising inflation coupled with government support has ultimately led to stronger nominal wage growth.
That's the average annual salary increase in real terms since the housing bubble burst in 1990.
In 2023, the average annual salary result of the spring wage offensive is 3.8%, which brings very little real purchasing power growth to workers considering an inflation rate of around 3.3%
At a time when inflation is falling to low levels again, the 2024 round is expected to be 5.28%.
As a result, real wages for Japanese workers will rise sharply this year.
The Bank of Japan has long said it will start raising interest rates when it becomes clearer that the period of suppressed wages is coming to an end.
That's what they did yesterday.
The central bank has also said it wants annual inflation to stabilize at around 2%, and to achieve this, wage results must be stronger, taking into account productivity growth.
Yesterday (March 19, 2024), the central bank issued several statements accompanying its monetary policy decisions (you can view them on its home page).
The statement – Changes in the Monetary Policy Framework – Explain the decision.
We read:
At the monetary policy meeting held today, the Bank of Japan Policy Committee assessed the virtuous cycle between wages and prices and believed that it is expected to achieve the 2% price stability target in a sustainable and stable manner. Forecast period ends January 2024
The central bank also said it did not expect major changes to policy settings “for the time being” due to “current economic activity and price outlook”.
As a result, policy changes are minimal:
1. “Encourage the unsecured overnight lending rate to remain at around 0% to 0.1%” – the overnight interest rate increased slightly from -0.1%.
2. “The central bank will continue to purchase Japanese government bonds in roughly the same amount as before.”
3. “If long-term interest rates rise rapidly, flexible response measures will be taken, such as increasing the purchase of Japanese government bonds and conducting fixed-rate purchases of Japanese government bonds.” – In other words, (2) (3) means that the central bank will use its currency issuance As a person, we maintain strict control over long-term interest rates and yields.
There are a few other changes (elimination of purchases of private ETFs and REITs).
But overall, the changes have been minimal.
The central bank now hopes the wage changes signal a shift in Japan's mindset from a deflationary bias toward a more normalized environment in which consumer demand can drive economic growth through a stronger wage contribution.
Note that this decision does not reflect that the Bank of Japan is aligning itself with other central banks.
The Bank of Japan has not responded to the supply-side pressures that have contributed to recent inflation.
They have always believed that this incident is only temporary and that raising interest rates will do nothing to address the root causes of price pressures.
However, one should not think that the Bank of Japan has ever abandoned its “monetarist” thinking about the causes of inflation and the possible role of raising interest rates.
They are pushing rates slightly higher, not because financial markets have been forcing them to do so, but because they believe rates can play a role in containing the inflationary pressures created by demand for stronger wage movements caused by square pressure.
This is a very orthodox view.
Regardless, this spring's wage offensive is a good outcome for workers, and hopefully Japan's “wage problem” is coming to an end.
Central Bank President Leaves Earth
While yesterday's Bank of Japan decision attracted a lot of attention, another former central banker, now CEO of the Bank for International Settlements, showed he is willing to enforce mainstream lies about public debt and more.
Interestingly, these so-called “independent” central bankers feel they have the ability to comment on fiscal issues, which are essentially political issues.
But, of course, central bank “independence” is just another aspect of the fictional world created by mainstream economists to depoliticize economic decision-making and make it harder for policymakers to be politically accountable to the voting public.
Anyway, Augustin Carstens gave a speech— Trust and macroeconomic stability: a virtuous cycle – March 18, 2024 in Germany, twisting the usual panic rhetoric about public debt, inflation and more.
Among other things, he said:
… Fiscal authorities must curb the continued rise in public debt… The era of ultra-low interest rates is over. Fiscal authorities have only a short time to put their house in order before public trust in their commitments begins to wane. As I've noted before, financial markets can remain calm in the face of severe imbalances until one day, they suddenly no longer do.
This is why many economies need to start fiscal consolidation immediately.
So while many countries are in or near recession, the bully is urging governments to make things worse and push unemployment even higher.
Journalists are already claiming that the October 2022 “Trusted Mini-Budget” is an example of how financial markets will ensnare a country that does not adhere to sound financial principles.
The Truss Folly is just another of these mythical events used to avoid using fiscal policy to promote general well-being.
At the time, financial markets attacked the gilt market and the pound, knowing that the policy authorities' commitment to their course of action was weak given the political environment.
Bond yields did rise, but that was because the Bank of England allowed them to rise.
And Truss's position as prime minister was so precarious that punters in the markets knew they could bet against her and win.
Similar bets have repeatedly failed in Japan over the years as Japanese authorities became more certain of their powers and goals.
Anyway, that’s it for today.
Music – Booker Little
This is what I heard at work this morning.
From an American trumpeter— Booker Little – His best quartets include:
1. Tommy Flanagan – Piano (tracks 1, 2, 5 and 6).
2. Wynton Kelly – Piano (tracks 3 and 4).
3. Scott Trafalo (Tracks 1-6) – Bass
4. Roy Haynes (Tracks 1-6) – Drums
Album of the same name—— Booker Little – was recorded in 1960 and released the same year.
Booker Little died at the age of 23 (of renal failure) the year after the film was released.
He carried on the hard bop tradition and excelled in his early teenage years.
What else he might have accomplished had he lived a full life we have no idea, but he left behind some wonderful music that is often on my playlists.
That's enough for today!
(c) Copyright 2024 William Mitchell. all rights reserved.
