Japan is a land of high employment but still no real wage growth

Some days quite a few of our themes come naturally together and this morning quite a few strands have been pulled together by the news from Nihon the land of the rising sun. Here is NHK News on the subject.

Workers in Japan are continuing to take home bigger paychecks. A government survey says monthly wages rose year-on-year for the 9th-straight month in April.

Preliminary results show that pay for the month averaged about 277,000 yen, or roughly 2,500 dollars. That includes overtime and bonuses.

The number is an increase of 0.8 percent in yen terms from a year earlier. But when adjusted for inflation, the figure came in flat.

Nonetheless, labor ministry officials say that wages are continuing on a trend of moderate gains.

As you can see this is rather familiar where there is some wage growth in Japan but once we allow for inflation that fades away and often disappears. This is a particular disappointment after the better numbers for March which were themselves revised down as Reuters explains below.

That follows a downwardly revised 0.7 percent annual increase in real wages in March, which suggests that the government’s repeated efforts to encourage private-sector wage gains have fallen flat.

Growth in March was the first in four months, which had fueled optimism that a gradual rise in workers’ salaries would stimulate consumer spending in Japan.

Actually Reuters then comes up with what might be one of the understatements of 2018 so far.

The data could be discouraging for the Bank of Japan as it struggles to accelerate inflation to its 2 percent price target.

Let us now step back and take a deeper perspective and review this century. According to Japan Macro Advisers real wages began this century at 114.1 in January 2000 and you already get an idea of this part of the “lost decade” problem by noting that it is based at 100 some fifteen years later in 2015. As of the latest data it is at 100.5 so it has been on a road to nowhere.


One of the features of the Abenomics programme which began in December 2012 was supposed to be a boost to wages. The Bank of Japan has launched ever more QE ( which it calls QQE in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield) as shown below. From July 2016.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

This is the main effort although as I have noted in my articles on the Tokyo Whale it has acquired quite an appetite for equities as well.

The Bank will purchase ETFs so that their amount outstanding will increase at an annual
pace of about 6 trillion yen(almost double the previous pace of about 3.3 trillion yen)

As it likes to buy on dips the recent Italian crisis will have seen it buying again and as of the end of March the Nikkei Asian Review was reporting this.

The central bank’s ETF holdings have reached an estimated 23 trillion yen based on current market value — equivalent to more than 3% of the total market capitalization of the Tokyo Stock Exchange’s first section — raising concerns about pricing distortions.

So not the reduction some were telling us was on the way but my main point today was that all of this “strong monetary easing” was supposed to achieve this and it hasn’t.

The Bank will continue with “QQE with a Negative Interest Rate,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.

The clear implication was that wages would rise faster than that. It is often forgotten that the advocates of QE thought that as prices rose in response to it then wages would rise faster. But that Ivory Tower world did not turn up as the inflation went into asset prices such as bonds,equities and houses meaning that wages were not in the cycle. Or as Bank of Japan Governor Kuroda put it at the end of last month.

Despite these improvements in the real economy, prices and wages have remained sluggish. This phenomenon has recently been labeled the “missing inflation” or “missing wage inflation” puzzle………. It is urgent that we explore the mechanism behind the changes in price and wage dynamics especially in advanced economies.

Most people would think it sensible to do the research before you launch at and in financial markets in such a kamikaze fashion.

The economy

There are different ways of looking at this. Here is the economic output position.

The economy shrank by 0.6 percent on an annualized basis, a much more severe contraction than the median estimate for an annualized 0.2 percent.

Fourth quarter growth was revised to an annualized 0.6 percent, down from the 1.6 percent estimated earlier. ( Reuters)

Imagine if that had been the UK we would have seen social media implode! As we note that over the past 6 months there has been no growth at all. In case you are wondering about the large revision those are a feature of the official GDP statistics in Japan which reverse the stereotype about Japan by being especially unreliable.

If we move to the labour market we get a different view. Here we see an extraordinary low-level of unemployment with the rate being a mere 2.5% and the job situation is summed up by this from Japan Macro Advisers.

In March 2018, New job offers to applicant ratio, a key indicator in Japan to measure the tightness of the labor demand/supply was 2.41 in March, signifying that there are 2.41 new job postings for each new job seeker. The ratio of 2.41 is the highest in the statistical history since it begun in 1963.

So the picture is confused to say the least.


There is a fair bit to consider here but let us start with the reality that whilst there are occasional flickers of growth so far the overall pattern in Japan is for no real wage growth. Only yesterday we were looking at yet another Bank of England policymaker telling us that wage growth was just around the corner based on a Phillips Curve style analysis. We know that the Bank of England Ivory Tower has an unemployment rate of 4,25% as the natural one so that the 2.5% of Japan would see Silvana Tenreyro confidently predicting a wages surge. Except reality is very different. If we stick to the UK perspective we often see reports we are near the bottom of the real wage pack but some cherry picking of dates when in fact Japan is  worse.

Moving back to Japan there was a paper on the subject of low unemployment in 1988 from Uwe Vollmer which told us this.

Even more important, the division of annual labour income
into basic wages, overtime premiums and bonuses
allows companies to adjust wages flexibly to changes in
macroeconomic supply and demand conditions,
resulting in low rigidities of both nominal and real wages.

On the downside yes on the upside no as we mull the idea that in the lost decade period Japan has priced itself into work? If so the Abenomics policy of a lower exchange-rate may help with that but any consequent rise in inflation will make the Japanese worker and consumer worse off if wages continue their upwards rigidity.

Meanwhile as we note a year where the Yen was 110 or so a year ago and 110 now there is this from an alternative universe.

The Bank of Japan’s next policy move may be to raise its bond-yield target to keep the yen from weakening too much, according to a BOJ adviser and longtime associate of Gov. Haruhiko Kuroda.

Or maybe not.

With its inflation target still far away, the BOJ must continue its current monetary stimulus for now, Kawai said

Also in his land of confusion is a confession that my critique has been correct all along.

While a weak yen helps the BOJ’s efforts to stoke inflation — and has been an unspoken policy objective — too much weakness can hurt businesses that import raw materials, while some consumers would feel the pain of higher prices for imports.

He seems lost somewhere in the Pacific as in terms of the economics the economy has seen a weak patch and you are as far away as ever from your inflation target yet you do less? Still the inflation target will be helped by a higher oil price except as I often point out Japan is a large energy importer so this is a negative even before we get to the fact that it makes workers and consumers poorer.





13 thoughts on “Japan is a land of high employment but still no real wage growth

  1. Interesting stuff and the parallels with the other central banks pretty strong.
    When I look at your analysis, I cannot help but think the following:
    1. Hardly any conventional economic models correctly predict what will happen;
    2. All central banks still believe in them;
    3. Therefore, they use policies which suit the theories rather than the facts.
    Or, put more simply, they have not a clue what is going on or what to do, but are too arrogant to admit it.

  2. Great blog as usual, Shaun.
    You wrote: “But that Ivory Tower world did not turn up as the inflation went into asset prices such as bonds,equities and houses.” Regarding housing prices the annual inflation rate for the Japanese residential property price index was 2.0% in 2017Q4, as opposed to a 0.6% CPI inflation rate for the same quarter, so real housing prices are being pushed up.
    It becomes clearer and clearer that the Bank of Japan aren’t really targeting a 2% inflation rate. The average annualized rate of inflation for the Japanese CPI has been 1.0%. The Bank of Japan would be well-advised to make their apparent de facto target their de jure target.

    • Hi Andrew and thank you

      Of course even 2% per annum is significant in a country where any other form of inflation is so low and real wages fell and then have stagnated since. However the asset price for Japan that has been “boom, boom, boom” as the Black Eyed Peas might put it has been the equity market.

      It is a moot point as to what level of the Nikkei 225 you start with as it rallied as Abe-san went ahead in the polls but let us say circa 9500 as opposed to the 22,675 of this morning’s close. More than doubled with of course the Bank of Japan actually buying on any dips.

  3. You do wonder why they just don’t abandon inflation targetting given how bad the CB’s have been at it.

    Japan is a case in point.Trillions of yen thrown at assets to create wealth effect wage growth-I’m just connecting the dots here- and no wage inflation.

    You think they’d stop and reassess before doing more of it and expecting a different outcome(definiton of insanity).

    Meanwhile,the velocity of money continues it’s slow death like the forgotten old Aunt left in the Shires by the new generations.

    • Hi Dutch

      Yes unless your currency falls ( and not even that in Japan) you do not see much inflation from even large scale QE. The US has mostly been below target as has the Euro area and that is before we even get to Japan. Yet asset prices have soared in more than a few places with equity markets and/or house prices rising. We have to suspect that the latter was the real objective all along.

  4. Hello Shaun,

    Billions if not trillions later we can see that it has no effect on wages – no surprise here then- well not for the rest of us in the real economy.

    so the money went into assets and shares.

    cant think why the CB would say that this would increase salaries – unless they mean the top 0.1% and the CEOs of the TBTF Banks and stock exchange companies.

    Follow the money .

    And we mustn’t be too surprised to see the Banks are the beneficiary of the loot……

    I do wonder how much more money they will need before they are no longer broke.

    I said a while back this is a 30 year crisis – maybe I too optimistic – lets see what 2038 brings…….


    PS: I ‘d rather we were like Japan – at least they make money on selling goods and not some dammed housing ponzi scheme !

    • Hi Forbin

      Japan does have its successes as you say although the price competition in markets where you make things and sell them internationally is something that has also hurt wage growth. I remember JW ( I have forgotten what he has reappeared as) forecasting that several years back.

      They claimed they had discovered a large supply of trace and rare elements recently and should that turn out to be true it will be interesting to see what happens. Whilst it is not the same as having energy or food resources you can easily barter one for the other in the high-tech world in which we now live.

  5. I wonder if the lack of wage inflation is due to the weakness of unions in Japan? That guy who has 2.4 jobs to choose from is negotiating with each employer as an individual, not as a representative of a labour market.

    Just a thought. It may, of course, just be that the jobs on offer are simply not very productive and there isn’t any juice to squeeze out for better wages. I see that fruit pickers are not keen to come to the UK. Since the locals won’t get out of bed/off the dole for the wages on offer, the fruit may be left to rot.

    • Hi TW

      It is not just Japan where trade unions have got weaker but which way the causality runs I am not sure. As their weakness may be driven by the same factor which has put downwards pressure on wages. One thing we do know is that if we continue to follow the Japanese experience of its lost decades then wages will come under more downwards pressure.

  6. So nothing new…

    Nice ads on this website… Since I am in Germany here they are in German. Translated: “Randstad – find your next job with Randstad” and identical ads from tempo-team and Voith.

    • Temporary employment companies… So there are jobs. But: Low wages and high flexibility from employees demanded. Sounds familiar.

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