Wage growth remains the missing link

The Bank of Japan’s efforts to lift inflation to 2% continue to face a number of headwinds. Spare capacity widened last quarter as output dropped, oil prices have fallen to fresh lows, and market inflation expectations have moderated. While the Bank had been hoping that the tight labour market would boost wage growth, summer bonuses dropped the most since 2009 this year, and aggregate wages were still falling slightly in the first seven months of 2015. All this suggests that policymakers will have to step up the pace of easing before long, setting the stage for further yen weakness and Nikkei outperformance.