Japan Shifts to Wage-Driven Inflation Phase, Finance Minister Says

Japan inflation is shifting from a phase driven by higher import costs to one driven by rising wages, Finance Minister Satsuki Katayama told parliament, as the government and central bank navigate a delicate policy balance.

Japan’s economy is seeing price rises driven by higher import costs and is on the cusp of shifting to a period of sustained inflation driven by rising wages, Katayama said on Wednesday, according to Reuters. The government’s scheduled consumption tax cut and payouts are aimed at cushioning households from rising living costs.

We are exchanging views with the Bank of Japan on various fronts. I see no gap between the view of the government and that of the BOJ, Katayama said when asked whether the tax cut plan could conflict with the central bank’s efforts to combat inflation with interest rate hikes.

The BOJ’s rate dilemma

The Bank of Japan raised interest rates to a 31-year high of 1.25 percent in September, according to Reuters, as the Iran war-induced energy shock, strong global AI demand and higher import costs from a weak yen heighten the risk of underlying inflation overshooting its 2 percent target.

Prime Minister Sanae Takaichi’s administration plans to cut by two years an 8 percent consumption tax rate on food items from April next year. Analysts warn the tax cut and the administration’s big spending plans could boost demand and contradict the BOJ’s efforts to rein in inflation, Reuters reported.

Acknowledging the trade-off

Katayama acknowledged that tax cuts generally work to push up inflation by stimulating demand, according to Reuters. But we will ensure that our responsible and proactive fiscal policy boosts Japan’s supply capacity in a way that does not accelerate inflation, she said.

The tension is the central economic question for Japan: how to relieve households squeezed by food, energy and transport costs without undoing the central bank’s fight against inflation. With the BOJ’s next policy meeting due the week of October 30, Katayama’s comments will be read closely for signs of how much room the government believes the bank has to move.

The coming months will show whether wage growth can sustain inflation at the Bank of Japan’s target without further rate rises. If wages keep pace with prices, households may finally see real incomes recover; if they do not, the government will face renewed pressure to cushion living costs while the central bank tightens.

Related reading: Five Central Banks Decide Rates in Three Days in Global Rate Test; see also German Coalition Vows Fast Reforms Amid Historic Test for Democracy.