On Tuesday we will find out whether the Bank of Japan raised the interest rate or whether it will do so only in April. The market is pricing a near 50/50 chance of the central bank maintaining its rate at the current level of -0.10% or if it hikes by 10bps to 0%. It is possible that the increase will be higher than 10 bps and we will land somewhere in the range of 0-0.1%.
While the end of the negative interest rate policy is of great importance in the media (Figure 1), it is not necessarily critical for the markets. The main argument for the decision to increase rates, which has been communicated for a long time, is not so much high inflation, but the amount of wage increases negotiated by trade unions in 2024. This year, the RENGO (Japan's largest trade union) announced on March 15 that in the 1st tally it secured the wage increase of 5.28% (exp. 4.1%; 2023 final figure 3.6%). This is the highest wage increase since 1991, and instead of strengthening, the yen even weakened quite a bit (15-Mar-2024: USDJPY +0.54% to 149.067).
Will higher wage growth drive consumer spending? In January this year Japanese All Household Spending turned out to be very weak: -2.1% M/M vs. Exp. 0.4% (Prev. -0.9%) and -6.3% Y/Y vs. Exp. -4.3% (Prev. -2.5%).
The RENGO second tally is going to be announced on March 22nd, the third one on April 4th and the final one in July. After the bubble burst in 1989, the BoJ tried to raise interest rates once in 2006 (Figure 2). It was only two hikes. Will it be more than one/two this time?
Figure 3 and 4 show the change in the yield of government bonds compared to the BoJ policy rate.
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