Japan’s Chief Cabinet Secretary, Yoshimasa Hayashi, emphasized the importance of broadening pay hikes among smaller firms to achieve sustained wage gains, aligning with Prime Minister Fumio Kishida’s efforts to shield consumption from rising living costs and support a fragile economic recovery.
In a Reuters NEXT Newsmaker interview, Hayashi’s comments came ahead of the Bank of Japan’s (BOJ) policy meeting on July 30 and 31, where discussions may include whether to raise interest rates from near-zero levels.
Hayashi highlighted the necessity of creating a “positive” economic cycle where firms can pass on higher costs through price increases, enabling them to sustain wage hikes. “We expect the Bank of Japan to decide specific monetary policy with an eye on what’s happening in the economy, and through close dialogue with markets,” Hayashi stated.
He stressed that extending this positive cycle to smaller firms is critical, amid market expectations of a potential interest rate hike by the BOJ this month. The government may also consider a fresh fiscal stimulus package later this year to mitigate the impact on households if inflation rises further, with the scale of spending dependent on upcoming economic conditions.
Following a decade of aggressive stimulus, the BOJ exited negative interest rates and bond yield control in March. Markets are increasingly open to the possibility of a rate hike at the upcoming policy meeting. BOJ Governor Kazuo Ueda has indicated readiness to raise rates if evidence shows that wage hikes are broadening and inflation remains around the 2% target.
While major companies have granted substantial pay raises in this year’s negotiations, it remains uncertain if smaller firms can follow suit. Hayashi noted the desirability of currency rates reflecting economic fundamentals but refrained from commenting on whether recent yen levels align with these fundamentals.
The yen has depreciated over 10% against the dollar this year, reaching 38-year lows due to the interest rate disparity between the U.S. and Japan. Speculation suggests Tokyo may have intervened in the market to support the yen, which has hovered around 157.50 to the dollar, following a six-week high of 155.375 last week amid suspected intervention.
Hayashi saw no immediate need to revise the 2013 joint statement between the government and the BOJ, which commits the central bank to achieving its 2% inflation target “at the earliest date possible.” This statement has underpinned former BOJ Governor Haruhiko Kuroda’s radical monetary policies and the justification for maintaining ultra-low interest rates in Japan.
Critics argue that the focus on combating deflation has become outdated, as Japan has experienced inflation exceeding the BOJ’s 2% target for over two years.
