In many ways, the world has turned upside down. It is not just central banks that have set policy rates below zero, but the entire German curve out through eight years have negative yields. Japan, which has the largest debt burden relative to GDP, has negative yields out through nine years. The Swiss curve is negative through 15 years.   

 It is not just core countries either. Ireland, which holds national elections in a couple of weeks, has negative yields out four years. Spain, which is struggling to put together a government following the election at the end of last year, has negative rates through two-years.  

Another aspect of the world that seems to be turned on its head is that several central banks and governments want businesses to give workers bigger wage increases. This is important. Many observers think that the role of central banks is to protect banks. This is to confuse means and ends. Central banks recognize that a healthy financial system is necessary for a robust economy, but it is the general economic performance that is the goal. 

Japan offers the most timely illustration of this generalization. Although higher wages were not one of Abe’s initial three arrows, it was recognized from the start that higher wages were necessary to boost growth and finally arrest deflation. The failure to ensure higher wages has undermined Abenomics.

Cash earnings in Japan were expected to have risen 0.7% year-over-year in December. They did not. They rose by a meager 0.1%. This is slower than in 2014. Annual wage growth has not surpassed 1% since 1997. When adjusted for inflation wages in Japan have not risen since 2011. Remember too that 1 April 2017 Japan is planning on hiking the retail sales tax from 8 % to 10%. 

Japan’s trade union confederation (RENGO) is seeking 2% wage increases in the spring negotiating round. This is a soft demand. Even if it were to get it, which it much likely won’t, it would not be enough for the BOJ to reach its 2% inflation target. For that, a 3% increase in wages is thought to be necessary. Finance Minister Aso has urged the unions to demand 3-4% increases. 

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