Market Round Up

Kazuo Ueda is set to become the next governor of the Bank of Japan (BOJ), succeeding the current governor of 10 years, Haruhiko Kuroda. Markets rallied at the announcement, as many expected the next governor to be appointed from inside current political circles and not to be an academic like Ueda, even though he has previously been a member of the BOJ policy board between the nineties and early 2000s. As markets opened, the Japanese yen strengthened by 0.2%, with optimistic investors likely viewing the news as a chance for monetary policy change under the new governor.

Despite market optimism, the new governor could face a tricky road ahead as the country faces a 41-year inflation high of 4%, with rising import costs a significant cause. Whilst the peak inflation data seems low in comparison with many of the western world economies, Japan has historically experienced extremely low and often negative inflation rates. Its ability to keep inflation so low is partly due to a range of government price controls, an ageing population, and negative interest rates. However, with record inflation data and increasing concerns about the cost of living, it looks as if pressure could be mounting on the central bank to move away from a zero-interest rate policy and push interest rates up to help combat inflation. Whilst most analysts expect the new governor to stick with the zero-interest rate policy for the foreseeable future, some economists believe that when the current governor does step down in April, Ueda will make a gradual shift towards tightening monetary policy, putting an end to the yield curve control we have typically seen over recent years, in an effort to stabilise prices. Although it is not yet known what might happen within the BOJ, it will be interesting to keep a close eye on its activity over the next few years.

The Office for National Statistics has released data showing that wage growth for the last quarter of 2022 surged to near-record levels, suggesting that the labour market continues to keep its head above water despite fears of a looming recession. The data showed that regular pay growth (excluding bonuses) was at 6.7% for the period, as employee strike action put pressure on employers to raise wages in aid of coping with the cost-of-living crisis. Despite the overall strength in wage growth, data showed clear disparities between public and private sector wages, with the private sector far outpacing public sector wage growth by roughly 3% over the same period.

Although wage growth may have seen a surprisingly strong uplift in recent months, it still continues to notably lag behind inflation, which has been felt by UK consumers who are worse off in real terms now compared to 12 months ago. Although wage growth brings positive news for the UK labour force, it does suggest that the labour market remains very tight. This might suggest inflation is likely to be stickier than originally expected, thus causing more problems for the Bank of England as it continues efforts to curb inflation and reduce it to a more sustainable level. But with such a strong data report, there will now be potential questions about whether the Bank of England will need to keep interest rates higher for longer to cool inflation and slow the UK economy.

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