JPY: Still hoping for wages – Commerzbank

The Bank of Japan remains convinced that rising wage growth will lead to sustainably higher inflation. Meanwhile, lower inflation regarding food prices is pushing down the overall rate. Excluding energy and food, inflation has been below 2% for some time now. The BoJ will therefore continue to proceed with caution when it comes to raising key interest rates. The JPY is therefore likely to remain stable against the US dollar and weak against the euro, Commerzbank's FX analyst Volkmar Baur notes.

BoJ to remain cautious

"The Japanese economy grew faster than expected in the second quarter, and the first quarter was also revised slightly upward. This development supports the assessment of the Bank of Japan, which had already raised its GDP growth forecasts slightly in its July meeting compared to its April forecast. However, there are still risks that US tariff policy could have a negative impact on the Japanese economy and that of its important trading partners. However, the Bank of Japan remains confident that domestic momentum in particular will be strong enough to keep inflation at 2% in the coming years, even after the one-off effects on food prices have passed. According to this view, wage growth in the coming years should fuel domestic demand to such an extent that price pressure driven by demand remains high enough to meet the central bank's target."

"Governor Ueda said in his speech at the Fed symposium in Jackson Hole that demographic trends and the increased willingness to change jobs are contributing to higher wage growth. In addition, the participation rate among women and seniors has now risen to such an extent that they will no longer dampen wage growth as they did in previous years. Furthermore, he does not believe that artificial intelligence is yet at a stage where it will weigh on the Japanese labor market in the near future. And at least for the moment, this seems to be working well in terms of nominal wage growth. Over the past 12 months, wages rose by around 3% year-on-year, significantly faster than in the four years before the pandemic, when the average rate of increase was only 0.7%. However, inflation has also been significantly higher in recent years."

"The Bank of Japan has stated that it intends to raise key interest rates if the economy develops as forecast. In recent months, however, it has sounded rather cautious about the possible timing of a further interest rate hike. We continue to expect another interest rate hike by the Bank of Japan around the turn of the year, either in December (19 December) or January (23 January). However, this move is already fully priced into the market, at least for January. We therefore continue to expect a weaker yen, but one that will remain roughly at today's level against the US dollar. Against the euro, however, this will result in continued weakness."