Modest wage gains bolster the case that the BOJ will stay on hold tomorrow

Wage data have continued to improve, albeit slightly, which bolsters the case that the BOJ will keep policy unchanged tomorrow. The latest labor report showed that base wages rose 0.5% (YoY) in Aug15, up from 0.4% in Jun-Jul15 and 0.2% in the early part of this year. Through the Jan-Aug period, base wages have increased 0.3% on average, the first positive reading seen over ten years ever since 2005. 

The cyclical factors have remained supportive. The job-to-applicant ratio (1.23 in Aug) and the unemployment rate (3.4%) suggest that the labor market conditions have remained tight, which obliged companies to raise wages to attract and retain workers. Despite the deterioration in exports and production in recent months, the negative impact on the labor market has remained muted. The BOJ may not find it necessary to ease policy at this moment - so long as it judges that the exports-led economic slowdown is temporary. 

What's worth noting is that inflation expectations have started to decline. In the corporate sector, expectations for output prices in the next five years have dropped to 1.8% during the 3Q Tankan survey, down from 2.1% previously. If the expectations for output prices continue to weaken, companies would lose the incentives to raise wages eventually, due to concerns about the capabilities of absorbing costs. This will be a disconcerting development from the BOJ's perspective, which could be a potential triggering factor for policy easing in the coming months.