The central bank sees wage increases as the key to lower inflation and is opting for a loose interest rate policy.

Japan narrowly avoided a recession before the turn of the year. According to official data from Thursday, gross domestic product (GDP) increased by just 0.1 percent from October to December 2022 on an annualized basis after the economy shrank by 1.1 percent in the summer. This means that there was de facto stagnation in autumn. In an earlier estimate, a GDP plus of 0.6 percent had been estimated for the final quarter.

According to economist Wakaba Kobayashi from the Daiwa Institute of Research, rising inflation is likely to have dampened consumption. In addition, the recovery in the service sector after the relaxation of the corona restrictions was not as strong as expected. As shown by the GDP data, private consumption, the backbone of Japan’s economy, grew just 0.3 percent. In the first estimate, the increase was still estimated at 0.5 percent. In view of the global economic slowdown, Japan’s heavily export-dependent economy is struggling with weak foreign demand.

More wages, more consumption

With a view to the forthcoming wage rounds in the spring, the government is pushing for wage increases in the economy so that private consumption can really pick up speed in times of high inflation. Meanwhile, Japan’s largest trade union group, “Zensen,” reached early agreements with employers on substantial wage increases. The deal, which affects around 240,000 workers in the service, textile and distribution sectors, was 5.28 percent higher than experts had expected.

Workers can look forward to a real increase in wages, as the rise in wages has outpaced inflation, which recently reached a 41-year high of 4.2 percent. The agreement, with which companies want to retain workers in economically difficult times, is in line with the interests of the central bank, which sees wage increases as the key to achieving its inflation target of two percent on a stable basis.

Japan’s interest rate policy is different

“The economy remains in a difficult position from April as there is a growing risk that growth in Europe and North America will stall amid persistent monetary tightening,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. Leading central banks such as the Fed in the USA or the European Central Bank (ECB) have long been pursuing a tight course in the fight against high inflation and are facing further interest rate hikes. Japan is resisting this trend: the Bank of Japan (BoJ) has been pursuing a policy of yield curve control there since 2016. The currency watchdogs are aiming for targets of minus 0.1 percent for short-term interest rates and zero percent for the yield on ten-year government bonds.

The BoJ is expected to keep its ultra-loose stance on Friday’s interest rate decision. It will also be the last interest rate decision in the 10-year term of office of central bank chief Haruhiko Kuroda, who is stepping down at the beginning of April. His designated successor, Kazua Ueda, has already dampened speculation about a rapid turnaround in interest rates.