Inflation, or rather the lack of it, has been the defining trait of Japan economy for the past several decades. Is a flexible laborforce…
Inflation, or rather the lack of it, has been the defining trait of the Japan economy for the past several decades. Despite the Abe administration’s efforts to ignite inflation, thanks to the falling oil price, price growth has remained lackluster, but there are signs that this is about to change according to a new research note from analysts at investment bank Nomura.
According to the analysts, Japan’s inflation expectations have been revised lower recently thanks to slowing scheduled earnings growth, which is one of the main components of inflation data. However, the analysts believe that hourly wages and unit labor costs, calculated by dividing hourly wages by production output are more closely related to inflation pressures, and are thus likely to be a better representation of upcoming price changes than the more inflexible scheduled earnings growth data:
“In terms of wage data, slow growth in scheduled earnings (base salary; Figure 3) is often cited as a reason for downward revisions in inflation forecasts. However, we think hourly wages – and unit labor costs, calculated by dividing hourly wages by production output – are more closely related to inflationary pressures (in the US, hourly wages are closely watched in inflation assessment) ”
Looking at the underlying data it appears a decline in working hours is behind the rise in scheduled earnings and hourly wages:
“Working hours have been on a decline since 2013, which we attribute to: 1) an increasing number of part-time workers becoming regular employees (their shorter hours have been reflected in scheduled earnings data) ; 2) rehiring of retirees following the retirement of the baby boom generation, which started in 2012; and more recently 3) the government’s promotion of “work style reforms, ” which encourages shorter hours.”
It could be the case that this labor force flexibility is, in fact, hiding the real state of Japan’s economy. The Nomura report points out that Japanese corporate firms do not usually cut jobs even when their businesses are slowing, and therefore labor costs tend to be elevated. Because of this entrenched view corporates may now be:
“Increasing the percentage of part-timers and/or managing the working hours of regular employees to prevent labor costs from rising when the labor market is increasingly tight.”
Some interesting food for thought.
