BoJ: Incremental wage hike at spring wage negotiation not sufficient to justify rate hike in March

While the Bank of Japan (BoJ) decided to hike in January based on higher confidence on the spring wage negotiation, wage growth is unlikely to accelerate in 2025.  While the labor union requested a 6.09% wage increase, the largest growth in thirty-two years, it remains an incremental increase from the +5.1% last year. In fact, the jump in the average wage increase in 2024 was much larger as it was coming from 3.6% in 2023 (Chart 1). Therefore, the results will probably not be regarded as additional evidence of a stronger virtuous circle between nominal wage and inflation to justify a further rate hike at the next monetary policy meeting from March 18th to 19th.Furthermore, the Yen’s strong appreciation against the US Dollar to 147 is relevant for the BoJ and likely to continue as the US Dollar is suffering from Trump policies. Furthermore, the softening FX carry trade index and rising VIX reveal falling attractiveness of carry trades (Chart 2). On the back of these developments, the speculative future position on the Yen has suddenly reversed, creating room for a further appreciation (Chart 3).The BoJ will surely take into the account the recent Yen strength as a positive factor alleviating cost push inflation. In fact, corporate import prices fell by -0.7% YoY inf February for the first time in three months. This would support companies’ profitability when they are facing pressure to lift wages during the wage negotiation period. Nevertheless, a rapid Yen appreciation triggered by a pre-emptive rate hike by the BoJ could deteriorate Japan’s economic outlook, as the manufacturing sector is under threat of a global trade war.All in all, the BoJ is anticipated to remain on hold at the March meeting with a hawkish tone. While the stronger Yen is alleviating cost push inflation, the economic outlook is deteriorating with increasing uncertainty on US policies. Furthermore, the expected incremental wage increase at the spring negotiation is unlikely to be regarded as additional evidence of strengthening virtuous circle between nominal wages and inflation yet.