MNI BRIEF: BOJ Warns Services Prices May Not Rise As Expected

Wage increases are being passed on to selling prices more easily than before, although labour costs are not significantly pushing up output prices in non-manufacturing sectors, the Bank of Japan’s full Outlook Report showed Friday.

“In comparison with data for 2017-2019, empirical evidence has shown a significant recent rise in the pass-through rate to output prices of increases in unit labour costs [ULC], which represent labour costs per value added,” the report said.

It noted that labour costs are pushing up output prices relatively strongly in manufacturing sectors such as food and machinery, but less so in non-manufacturing.

“This may be attributed to active labour-saving investment in non-manufacturing sectors, where labour shortages are severe, leading to improved labour productivity and downward pressure on ULCs,” the report said, suggesting selling prices in services may not rise as much as the BOJ had expected.

The analysis contrasts somewhat with the bank’s previous view that a strong link between labour costs and output prices in non-manufacturing is key to achieving the 2% price stability target through higher services inflation.

The report also noted that part-time wages have continued to rise at a relatively high pace, driven by tightening labour market conditions and minimum wage hikes. The share of employees earning below the new minimum wage levels set later in the year has increased steadily, reflecting repeated upward revisions and a growing direct influence of minimum wage policy on overall wage levels.

The BOJ Board held the policy rate at 0.5% this week, with Governor Kazuo Ueda signalling the potential for a future hike based on wages growth. (See MNI BOJ WATCH: Ueda Hints Bank Close To Hike; Wages Key)