Abe Adviser Ito Touts Minimum Wage Hike, Taxing Cash Hoards

(Bloomberg) -- Japan should use targeted measures to push wages and inflation higher instead of deploying additional monetary or fiscal stimulus, said Takatoshi Ito, an adviser to Prime Minister Shinzo Abe.

The nation’s tight labor market is bringing long-awaited pay increases to some workers but the practice of setting wages based on looking at past price trends needs to be abandoned to achieve the pay rises needed for sustainable inflation, said Ito, who is considered a candidate to be the next central bank chief.

Japan’s core consumer prices rose 0.3 percent in April, the government reported last week, well below the Bank of Japan’s 2 percent goal.

Ito said he disagreed with former Federal Reserve Chairman Ben Bernanke, who said last week during a visit to Tokyo that if Japan continues to struggle to generate inflation, more explicit coordination of monetary and fiscal policy could be “the most promising option.”

Ito said the power of monetary policy is fading and that further government stimulus could risk loosening fiscal discipline. Instead, Japan should consider a big, one-time jump in the minimum wage, as well as taxing cash-hoarding companies to prompt them to raise wages.

An index of profitable companies that reward workers well could be created to attract investors to these businesses, including the Government Pension Investment Fund, he said.

According to Ito, these measures would push wages and inflation higher in tandem.

Ito also said that as U.S. rate increases pressure Japanese yields, the BOJ should let the yield on benchmark 10-year government bonds rise as high as 0.25 percent or so. Market participants see 0.1 percent as the upper limit to the BOJ’s tolerance for deviation from its target of about zero percent.

The BOJ doesn’t need to keep buying Japanese government bonds at the targeted annual pace of 80 trillion yen ($719 billion) to keep the rate around zero, according to Ito, a professor at Columbia University and a long-time ally of BOJ Governor Haruhiko Kuroda.

“The BOJ can say it’s still around zero even when it’s beyond 0.1 percent. They can expand the acceptable range without changing its language,” Ito said in an interview in Tokyo on Friday. “If they can let it rise to 0.2 percent or 0.25 percent without saying anything, their purchases can fall” incrementally to as low as 40 trillion yen annually.

The BOJ can keep going with its current policy scheme, and discussions of an exit won’t be meaningful until inflation gets closer to its 2 percent goal, Ito said.

Private economists surveyed by Bloomberg expect core inflation will rise to 0.7 percent in the year ending in March 2018. The BOJ board has forecast 1.4 percent