Date: 08 Sep 2017

It’s probably fair to say that currency traders don’t pay that much attention to Japanese labour markets given that, and as was again evident in Bank of Japan (BoJ) Governor Haruhiko Kuroda’s Jackson Hole interview with Bloomberg, the BoJ remains steadfastly committed to a policy of Yield Curve Control which, at least for the foreseeable future, involves keeping the yield on the benchmark 10-year Japanese Government Bond at close to zero. After all, unless wages in Japan start to rise at such a clip as to push up inflation towards the BoJ’s 2 per cent target, then the currency market will likely assume BoJ policy settings will remain broadly unchanged. But traders might wish to park at the back of their minds that the Japanese labour market continues to be tight and the hourly wage per employee has picked up and is now growing at some 1 per cent per annum. Japan-based analysts for France’s Societe Generale (SocGen) feel that “if the current relationship holds [between the unemployment rate and hourly wages] and if the unemployment rate were to fall to around 2.5%, we could see hourly wage growth of around 2 per cent year-on-year.” It’s SocGen’s contention that “businesses [in Japan]  will likely be forced to pass on the increase in wages by raising prices. Thus, we expect that as firms begin to pass on the increase in wages, the move toward a complete exit from deflation and likelihood of achieving the 2 per cent price stability target should strengthen.” Traders may also wish to consider how the labour market in the south-east of England tightened as a consequence of construction work for the 2012 London Olympics.

The next Olympics will be held in Tokyo in 2020 and arguably Japan has less of a construction worker pool to draw on than was the case in Britain which was able to rely on labour from across the European Union. Of course in the short-term this is all somewhat academic for traders, but these kinds of issues are worth bearing in mind. Certainly, SocGen’s London-based Chief Global Forex Strategist Kit Juckes believe “when the calm period on yen vol finally comes to an end it will probably trigger yen strength rather than weakness” and thinks “a decisive break below USD/JPY 95 is now more likely than a return to levels in excess of 125.”

Written by Neal Kimberley, External Currency Analyst.