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July 10, 2023

Forward guidance on… wages? Japan’s companies promise higher pay and consider AI – as stocks and GDP forecasts perk up

As Japanese demographics suddenly turn inflationary, companies are scrambling for solutions.
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In-house blogger
Guest blogger
Tetsuo Harry Ishihara
Strategist, Macrobond consultant, and former adviser to Japanese regulators
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.

The Tankan job survey

Japan’s labour market has become extremely tight as the nation’s famously challenging demographics flip from deflationary to inflationary (at least for now).  Wage growth is at its highest in 30 years. Over 80 percent of CEOs are reporting labor market tightness.1

The corporate Tankan survey (visualised in the next chart) shows that for both small and big business, employment conditions are almost as tight as they were when the asset bubble burst over 30 years ago. 

Food services, information technology, and construction staff are in high demand. Truck drivers are agitating for an end to offers of free delivery. 

To attract new recruits, some companies across multiple industries have started giving forward guidance on wages. Here are some quotes from a recent edition of the Nikkei:

“We will continue to raise wages after 2024”

“We will raise wages through at least 2027 by 4 percent per year”

“We have agreed with the union to raise base salaries every year through 2030”

“We will raise wages by 6 percent in FY2024 as we did in FY2023”

“By 2030, annual compensation will be raised by 60 percent from 2020 levels”. 

(Source: Nikkei, June 27)

<h3 class="blog-h2 blog-h2-styles first-item" id="Global-comparisons">Global comparisons</h3>

Fed Chair Jerome Powell often speaks of the labour market tightness in the US, but the important “prime” (aged 21-54) segment looks much tighter in Japan. 

As the next chart shows, the proportion of people in that prime segment that are employed is approaching 90 percent. That’s the highest rate among major OECD nations. 

Another ratio, the prime age “labour force participation rate” – meaning the labour force as a percentage of the population over the age of 16 – is also approaching 90 percent in Japan, versus 82 percent in the US and 83 percent in the OECD.  

Does the BOJ want inflation?

Japan’s equity and real estate bubbles burst in 1990 and 1991 respectively. The bubbles were the result of stimulative policies to fight the recession caused by the 1985 Plaza Accord and the 1986 US-Japan Semiconductor Agreement. When these bubbles burst, Japan entered its infamous lost decades of disinflation and deflation, as the next chart shows.

Over those 30-plus years, any inflation proved transitory. Japan’s demographics were always seen as a driver of deflationary forces.

However, that may be changing. Excluding subsidies, consumer price inflation is near 40-year highs, while wage growth is near 30-year highs. Producer input costs – defined as wages, producer prices and the yen2 – may have crossed their “boiling point” thresholds, according to preliminary BOJ research3. (The central bank mentions the “menu cost” hypothesis to explain the existence of thresholds; the classic example is price stickiness at restaurants, which avoid hiking prices and printing new menus until the benefits outweigh the costs.) 

Passing those thresholds, especially for sticky wages, implies that companies might continue to pass on costs to consumers if their cost growth is sustained. The 9,000 enterprise Tankan survey on sales prices (output prices) may be a useful indicator.

Top priority: wage growth

Meanwhile, wage growth continues to be a top priority for policy makers, who are embracing the signs of change. The BOJ has pursued a 2 percent target for “stable and sustained inflation supported by wages” for over a decade. Post-pandemic inflation started with cost-push or “bad” inflation, but the goal is to attain demand-pull or “good” inflation4. Wage growth, which is sticky, is seen as essential to attain this goal. 

So after 30 years of fighting deflation, Ueda’s BOJ is letting inflation run hot by supporting wage growth. BOJ support from the Kishida administration is fanning the flames, calling wage growth the absolute top political priority. 

AI is changing minds on long-term growth rates

The labour shortage is also stoking excitement over artificial intelligence. (And Japan is delighted that ChatGPT works in Japanese.) The next chart tracks mentions of AI in some of the world’s biggest newspapers; Japan’s flagship publications stand out.

AI has considerable potential to boost GDP, which after all is driven by productivity. In 2017, the Ministry of Internal Affairs projected that AI (including the “Internet of Things”) would boost 2030 real GDP from JPY 593 trillion to JPY 725 trillion, implying the average growth rate would almost triple from 0.9 percent to 2.4 percent, as the next chart shows. 

In 2016, using a close approximation of GDP, Accenture made a similar projection – calling for Japan’s annual economic growth rate to triple from 0.8 percent to 2.7 percent by 2035.5

A rejuvenated chip sector – and stock market

AI and robots will naturally boost demand for semiconductors, which some call the “new oil” of the 21st century. Japan’s leadership in the 1980s was badly hurt by the US-Japan Semiconductor Agreement, which enforced not only export restrictions, but the disclosure of cost structures and the acceptance of prices set by the US. Market share went to Taiwan, Korea and China. The digital age that gathered pace in the 1990s coincided with Japan’s lost decades and hastened the slide.

However, post-pandemic cooperation with the US and Europe on semiconductor production and development is rejuvenating Japan’s tech industry. Robots and self-driving cars will probably be a focus, supported by Japan’s existing expertise.

Finally, the bullish implications of these trends are showing up in Japan’s stock market, as the last chart shows. 

The Nikkei is neck and neck with the Nasdaq – supported by the escape from deflation, robust wage growth, the potential of AI and a rejuvenated semiconductor sector.

1 Nikkei survey of over 140 companies, published July 3, 2023

2 A weaker yen drives import costs higher, and Japan imports about 80 percent of its energy.

3 T. Sasaki, H. Yamamoto and J. Nakajima (2023), Nonlinear Input Cost Pass-through to Consumer Prices: A Threshold Approach, Bank of Japan Working Paper Series 

4 Detailed in, As Ueda takes the helm of the Bank of Japan, do record wage hikes finally portend “good inflation? And Sustainable monetary easing and record wage hikes 

5 M. Purdy and P. Daugherty (2016), Why Artificial Intelligence is the Future of Growth, Accenture.

This article was published in conjunction with Japan Exchange Group (JPX) and the original can be found here.

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