Japan's Economy at the Golden Crossover: Careful What You Wish For

Over the last few years, there has been a remarkable contrast between the performance of the Japanese stock market and the economy. Major companies with significant overseas exposure have benefited hugely from the extraordinary weakness of the yen. Meanwhile, domestic demand, particularly consumption, has stagnated as inflation, although low in international terms, has consistently outpaced wage rises. 

The result: people have less money in real terms and therefore spend less.

Wisely, the Bank of Japan has refused to tighten monetary policy until there is a change in this configuration. But now there are clear signs that a new reality is taking shape. Inflation is set to decline, and wage hikes are set to increase. Thanks to this "golden crossover," long-suffering Japanese workers will finally see real income growth – and spending should rebound accordingly. 

Inflation Measures

What is the evidence? First, some measures of inflation have already fallen sharply. Japan's Producer Price Index stood at 10.6% year-on-year in December 2022. Currently, it stands at 0.6%. 

Consumer prices have longer lags but are on their way down too. A weak currency alone will not make a difference. The yen would need to keep falling by an equal or greater amount to keep the inflationary dynamic intact. Short of that, prices will steadily flatten out.

The financial markets agree. Expectations of Japanese inflation over the next ten years – as implied by the gap in yield between inflation-protected and regular bonds – is currently 1.30%. That is well short of the BoJ's target of "a sustainable 2%."  Indeed, with expectations so low, it is quite possible that the BoJ may have to ask the government to reduce or soften the inflation target. 

Labor Situation

Second, Japan's structural labor shortage is increasingly evident. In the most recent "Tankan" survey of business conditions, the ease of employment rating of minus 36 was the lowest reading since the tail end of the bubble in 1991. Hiring has not been as difficult for more than thirty years.

The shunto spring wage negotiations between management and unions ended with a settlement of 5.3%, 1.5% higher than the previous year. That will apply to the roughly 25% of the workforce who work for large companies. 

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What about the other end of the labor market?  A clue may come from the database of human resource company Recruit which dispatches part-time workers, usually paid by the hour. In February 2023 they scored a raise of 2.1%. This February, the year-on-year increase was 4.4%.

A New Economic Configuration

If these straws in the wind are accurate predictors of the direction of travel, then many familiar phenomena will go into reverse. A stronger domestic economy should require higher interest rates, which would quite likely lead to a stronger yen and a dwindling of the windfall profits enjoyed by exporters and large international companies. There would be fewer tourists too. 

Meanwhile, immigration, already visibly increasing, would accelerate.

This new configuration would be no passing phase but a semi-permanent state of affairs. The big picture would be a swing in the division of spoils from capital to labor, something not experienced for decades.

Seasoned executives will remember what the labor market was like in 1991. Companies were so desperate to hire new graduates that they signed them up before the recruitment season officially started. It was a practice called "aotagari" ("harvesting the green rice"). Inducements such as trips to hot spring resorts and even Hawaii were common. Something similar is happening now, with one auto-related company dangling a signing-up payment of ￥1 million JPY ($6,600 USD) in front of newbies.

Japanese companies are already installing labor-saving software and equipment as fast as they can. And no doubt there will be much more to come as labor-intensive industries seek to hold down costs. 

A Different Labor Market

Nonetheless, tight labor markets usually go with declining productivity, as people with less or no experience and skills are pulled into the labor force. Workers are undertrained and overpromoted and have the luxury of quitting whenever they feel like it.

In the booming 1980s, the older generations of Japanese who remembered the post-war privations were shocked by the supposedly lazy, selfish, and clueless generation of shinjinrui ("new humans"), so-called because their values seemed so strange. Perhaps, a similar phenomenon is on the way many decades later as those hardened by the long years of deflation look askance at the carefree, job-hopping new generation.

It will be a great time to be an employee and a super-stressful time to be a manager.

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(Read the article in Japanese.)

Author: Peter Tasker

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