YOKOHAMA, Japan — There's something changing in the Japanese economy, according to the country's top central banker.
Speaking with CNBC on the sidelines of the 2017 Asian Development Bank meeting in Japan, Bank of Japan Governor Haruhiko Kuroda explained that he is seeing shifts in the country's labor market, and that could augur good things for the Japanese economy.
In fact, he predicted that wages and prices would begin to accelerate.
"[A projected growth rate of] 1.5 percent is not great, but in Japan it is well above medium-term potential growth rate, meaning that the output gap continues to shrink and becoming positive and the labor market continues to tighten so that wages and prices would eventually rise to achieve the 2 percent inflation target around fiscal 2018," Kuroda said.
"The point is that the yield curve control has been functioning quite well and of course if this is around 0 percent 10-year [Japanese Government Bond] target could or should be changed — of course every monetary policy committee meeting, the policy board would discuss and decide whether it should be adjusted upward or downward," he said. "But I feel that since the economy is likely to grow at around 1.5 percent, and wage and prices would start to accelerate in coming months and years, I think we should, for the time being, maintain this around 0 percent operational target."
As for specifics within the labor market, the central banker said he expects the annual spring wages negotiations to result in a base pay increase similar to last year's. And while that may not sound like much, the deal-making between businesses and labor tends to "forecast past the 12 month inflation rate, to settle the wage increase or pay rise," Kuroda explained.
"And in the last 12 months, as I said, inflation rate was down, and basically in negative territory. And yet, they agreed to base pay increase, almost comparable to last year's pay rise," he said. "That means that business and labor have become, to take into account, future inflation rate, in negotiating base pay increase, probably for the first time in the last several decades."
Additionally, small and medium sized enterprises are facing "really tight labor market conditions," and part-time workers have seen their pay rising "significantly higher" than regular workers in large companies, according to Kuroda.
"So all of this makes our contention more reasonable," he said. "In the sense that labor market tightness has been affecting, initially part time workers and irregular workers, but now regular workers in small and medium sized enterprises are experiencing higher pay increases."
For many years, Japanese corporations have appeared reticent to pay out big raises, but Kuroda explained why he thought that was changing.
"The Japanese corporate sector now enjoys historic high level of profit, better than ever. — even better than during the bubble period — they have huge profit, huge cash to spend," he said. "So Japanese corporate sector has been increasing capital investment, and now, somewhat belatedly, started to increase wages."
"So I think if we continue our fiscal and monetary policy in coming years, if labor market continues to tighten ... if this situation continues, eventually, tight labor market conditions would force wages to rise significantly," Kuroda added.
Although Kuroda said deflation "has gone already" from Japan, he acknowledged that "headline inflation has been quite slow to adjust upward" in part because of weakness in oil prices. More importantly, he said, "Japanese people — businesses as well as labor unions — are accustomed to deflationary situation for 15 years."
"So the mindset is still quite cautious about inflation expectations, but I'm quite sure that with continuous accomodative monetary policy, supported by fiscal policy, we'd be able to eventually raise wages and prices significantly," he said.
Turning to the BoJ's potential exit from its extraordinary policy, Kuroda declined to comment on any specifics.
"Inside the bank, of course, we have various simulations of potential exit strategies and so on and so forth," he said. "But as I said, it's premature to openly discuss exit strategy at this moment when inflation rate is still close to zero — although improving."
Correction: This article has been updated to clarify Bank of Japan Governor Haruhiko Kuroda's comments on deflation being "gone already" from Japan.