The Bank of Japan (BoJ) has expressed concern that wage growth is failing to keep price with rising consumer prices.
The minutes from the BoJ’s board meeting last month revealed that members are worried that if the Bank is to achieve anywhere near its 2% inflation target, real incomes will lag this figure, reducing spending power.
One member warned that significant pay rises for Japanese workers are unlikely to come through until next April when pay reviews are held ahead of the next fiscal year.
However, Capital Economics’ Julian Jessop said Japanese consumers will have to bear more strain if the government’s debt problem is to be reined in.
‘Higher inflation is the only plausible answer to Japan’s fiscal problems, but even achieving the current target of 2% may not be enough,’ he said.
‘On the basis of the international conventions used by the IMF, Japan’s gross government debt is already more than 240% of GDP. Even net debt is around 140%. Despite very low interest rates, the level of debt has been climbing as a result of weak growth and successive fiscal stimulus packages, while nominal GDP has been flat or falling as a result of persistent deflation.
‘Japan’s government debt is not yet on a hopeless path, but the risks are increasing by the year. Only small variations in the profiles for nominal GDP, the primary budget deficit or the level of interest rates would be needed to push the debt/GDP ratio substantially higher. Vary two or three of these factors together and the debt/GDP ratio could soon explode.’