Are BOJ now entering Team Transitory?
The risk of the BOJ holding off and letting inflation run hot for a while is one we’ve seen before. We saw central banks pushing this narrative in the US and Europe, focusing on non-core food & energy inflation, then being hit by persistent, sticky high service sector inflation amidst continuingly strong labour markets. Whilst the magnitude of Japan’s inflation problem definitely feels smaller, the risk of focusing on external influences and being complacent about stickier inflation feels very familiar. A challenge here is how the BOJ actually measures ‘sustainable 2% inflation’. They focus highly on the Shunto spring wage negotiations (that this year saw pay rises in big corporations negotiated at above 3%, the highest figure in 30+ years), but given these are annual, it’s hardly an explanatory data point. Broadly, wage growth remains firm and well above long-term trends.
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