Business / Economy

BOJ must adopt pay goal as deflation looms, price professor says

by Toshiro Hasegawa

Bloomberg

The Bank of Japan must take the unusual step of preventing a return to deflation, according to a professor at the University of Tokyo who tracks prices.

The central bank should scrap its 2 percent inflation target and replace it with a goal for higher wages, said Tsutomu Watanabe, the professor of economics behind the UTokyo Daily Price Index. More quantitative easing would be pointless, he said. Shifting from prices to pay will require a change in the 2013 joint agreement between the bank and the government. A spokesman for the BOJ declined to comment.

Watanabe’s logic: wages are stuck in a rut at industries nationwide and need to be kick-started. And while people expect prices to rise, they are not counting on higher salaries, so they are cutting back on spending. That is the opposite of the “virtuous cycle” Prime Minister Shinzo Abe has sought to get going.

“Don’t tell people we want to increase prices; say we want to raise wages,” Watanabe said in an interview in Tokyo. “That will be better accepted. And prices will rise as a result. It’s a better way of talking about it.”

Bank of Japan Gov. Haruhiko Kuroda is in a bind.

After two rounds of unprecedented stimulus in April 2013 and October last year, inflation is slowing. Stripped of the effect of last year’s sales-tax increase, prices rose just 0.2 percent in January from the previous year. Last March, the month before the tax change, they gained 1.3 percent.

Average earnings in Japan, including bonuses and overtime, climbed 0.8 percent in 2014. Wages adjusted for inflation fell 2.5 percent, labor ministry data show. They dropped in January for a 19th straight month, even as Abe presses companies to pay more.

“Generally, a central bank shouldn’t get involved in wages, but in these kinds of circumstances, it’s unavoidable,” Watanabe said.

The central bank or the government should use industrial policy to try to increase pay in different parts of the economy where it hasn’t gained, Watanabe said, giving public universities and barbershops as two examples.

Watanabe’s price index provides a rate of inflation every day, with a three-day lag, using cash-register scanner data for about 350,000 products at 300 supermarkets across Japan, according to its website.

The government’s nationwide Consumer Price Index provides a figure once a month with a one-month delay, while its data for Tokyo come out at the end of each month without a time lag.

Daily prices fell an average of 0.2 percent from a year earlier over the week through March 12, according to the university’s measure, which Watanabe says tends to be about 0.5 percentage point lower than the CPI. Instant noodles showed the largest price increase in February, while cereals registered the biggest decline.

Watanabe’s research department surveyed 15,000 people before the sales-tax increase in April, asking whether prices will rise and if this is a good thing. Most said they will increase and it is undesirable, according to Watanabe.

“We need a broader awareness among people that higher prices are good for them,” he said.

The BOJ’s goal is for a 2 percent increase in an index of consumer prices excluding fresh food. Watanabe says the bank should target wage growth of slightly more than 2 percent.

“I’m not saying we should switch to a wage target for the long term,” Watanabe said. “At some point we should get back to normal with a CPI target. But for a limited period, in order to reach 2 percent inflation, we should focus on wages.”