Japan’s newly appointed Prime Minister Sanae Takaichi is dealing with a serious problem just weeks into her job as workers can’t buy as much with their paychecks as they used to.
Government numbers from Thursday show things getting worse. September marked the ninth straight month of declining real wages. And when you zoom out? Worker buying power hasn’t budged since 2021. That’s putting real strain on families.
Here’s what makes it tricky. Workers are actually getting raises — nominal pay climbed 1.9% year over year. But inflation wiped out those gains and then some. Real wages ended up down 1.4%.
Takaichi is Japan’s first woman prime minister. She’s pledged to revive “Abenomics,” the late Shinzo Abe’s signature economic approach. Three basic pieces: ultra-easy monetary policy, big fiscal stimulus, and structural reforms.
She’s moving fast. As reported by Cryptopolitan, the new prime minister is already planning a 13.9 trillion yen ($92.2 billion) spending package to help households cope with rising prices. Nikkei says the package tops 10 trillion yen, with subsidies for electricity and gas bills, plus help for small and medium companies trying to boost wages.
Spending plans could backfire
There’s a catch though. That spending could clash with Japan’s inflation fight.
Headline inflation has topped the Bank of Japan’s 2% target for 41 months running. It hit 2.9% in September. Household spending that month? Just 1.8%, missing the 2.5% economists expected.
Marcel Thieliant at Capital Economics isn’t buying the stimulus approach. “Opinion surveys show inflation is the number one concern for Japanese voters. If Takaichi responds with populist measures such as energy subsidies or cash transfers, that would only enhance those inflationary pressures,” he said.
Japan doesn’t have tons of options here. Justin Feng from HSBC warned that an oversized stimulus package funded by government bonds could “potentially diminish Japan’s fiscal credibility.”
The numbers back him up. Japan’s debt-to-GDP ratio hit almost 250% in 2023, per IMF data. That’s among the highest anywhere in the world.
Jesper Koll at Monex Group was blunt about it in October: “If inflation in Japan is still is not below 2% in six to nine months time, the popularity of this cabinet is going to plummet because [for] the Japanese people … the number one, number two, number three concern is inflation.”
Currency weakness adds to pressure
High inflation could force Takaichi to rethink her stance on expansionary monetary policy. Keeping rates low tends to weaken the yen, which drives up costs for imported goods.
“The latest real wage data reflects Japan’s persistent inflationary pressures. If the Bank of Japan does not proactively react in a timely fashion, it runs the risk of appearing to fall behind the curve,” Feng said.
The BOJ held its benchmark rate at 0.5% last month. That’s six meetings in a row with no change. Governor Kazuo Ueda says the central bank isn’t “behind the curve” on inflation.
Takaichi’s tone has softened from her harsh criticism of BOJ rate hikes last year. She told parliament earlier this month that Japan hasn’t achieved sustainable inflation, hinting the central bank should go slow on raising rates.
The BOJ has said it’ll increase rates once it sees a “virtuous cycle” of rising prices and wages together.
“Under the new political landscape, the bar is now higher for the Bank of Japan to tighten monetary policy,” Feng noted.
That doesn’t mean the BOJ won’t act. “The current process of policy normalization will gradually continue. In our view, the question on future rate hikes is a matter of when, not if,” Feng added. Thieliant at Capital Economics thinks the BOJ will push its policy rate to 1.5% by 2027.
Japan has lots of retirees drawing pensions and people on fixed incomes. Inflation is “very painful” for them, Tomohiko Taniguchi at the Fujitsu Future Studies Center told CNBC’s “Squawk Box Asia” last month.
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