Market Round-Up

Since the 1990s, the Japanese labour market has been characterised by stagnant wage growth, with contemporary real wages practically on par with earnings at the start of the millennium. However, a noticeable rise in living costs, a shrinking labour market; due to a declining population, and pressure from Japanese labour unions, have all forced Japanese companies to deliver the highest wage growth in over three decades.

Economists now expect unionised employees at large Japanese companies, like Honda and Nippon Steel, to receive an average wage increase of over 4%, exceeding the inflation rate of 2.2%. This real wage growth marks a significant milestone for the world’s fourth largest economy, where GDP growth has lagged behind Japan’s economic peers.

In contrast to most central banks, the Bank of Japan (BoJ) will be hoping that this wage momentum continues. This is because after the BoJ implemented its first interest rate hike since 2007, finally abandoning the era of negative interest rates, inflationary pressure needs to remain strong. Not an easy task for a country which has flirted with deflation many times over the past decade.

The inflation expectations of the UK public now stand at the lowest level since August 2021, gradually closing in on the historic average of 2.8%. Over the next 12 months, the average Briton expects the inflation rate to be 3%, a February Bank of England (BoE) survey found, down from 3.3% in November. The February figure highlights how the public now perceives inflationary pressures to be waning. This is likely since the inflationary fallout from the outbreak of war in Ukraine begins to ease, with energy levels subsequently declining.

Such news should reinforce the assumption that the Bank of England (BoE) will begin cutting interest rates later this year. This is because inflation expectations affect wage dynamics and consumer spending habits, both important factors in determining the rate of inflation. However, headline inflation for January remained at 4%, still double the BoE’s 2% target, but considerably below the 42-year peak of 11.1%, recorded in October 2022.

Lower interest rates would be welcomed by markets as they would herald the beginning of the end of the BoE’s contractionary monetary policy, in place since November 2021.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the investments mentioned. Investments and income arising from them can fall as well as rise in value. The information and views were correct at time of publication but may have changed at point of reading