news article background image
2018-08-17Macro `n Cheese

On the Cusp of a New Paradigm?

This week’s post is a short run through of recent Japanese data.

Not only did the 2018 Q2 GDP-numbers provide evidence of a much hoped for rebound after last quarter’s flirtation with recession, but outpaced expectations and the components also show underlying strength with both private consumption (2.8% AR) and investments (5.2% AR) rising briskly. The main detractor was trade with the small increase in exports (0.8% q/q AR) dwarfed by the rise in imports (3.9% q/q AR). All-in-all, the numbers point to a continued strong economy, where capacity constraints are becoming ever more present. More presciently, the latest numbers point to Q1 being more of a blip in the strongest cyclical rebound Japan has experienced for a long time, than a herald of worse things to come.


For instance, many analysts read the strong investments growth as a sign of labor market strains as companies seek to replace labor with capital. Indeed, for some time now, it has been obvious that the Japanese labor market has strengthened beyond anything we have seen since the days preceding Japan’s lost decade(s).


At least some of the arrows fired by Abe seem to have hit target. The labor force participation rate is on the rise and, as can be seen, most of it has to do with an acceleration of the trend where females are entering the labor force en masse (well...). Consequently, female employment has been rising considerably stronger than male employment over the past few years. (Work-)Immigration, while still extremely low from an international perspective is also picking up steam:


The fact is, thanks to the above changes, among other things, the labor force has actually managed to rise, while the population in active age cohorts is diminishing.


Taken together, the above should, nonetheless, imply that cost pressures (wages) are on the rise. Indeed, the few latest outcomes for wage data has gotten markets all fired up about nascent cost pressures.


That very last outcome of Total Cash Earnings is perhaps not all that it is made out to be (high bonus payments), but even when looking at Scheduled Contractual Cash Earnings (basically the negotiated monthly wage), there is still an obvious upward trend. The contributions look something like this:



To help stave off cost pressures from rising wages, it does seem like companies are trying to balance rising costs of labor with increased investments in labor-replacing machines. Lo’ and behold:


Unfortunately, the above data is not only very noisy, but also not available for the latest quarters. The Tankan-survey does contain such information and is somewhat more stable. A simple PCA-analysis on mainly service industries show how the investment climate has changed more recently in a more positive direction, which might be read as a signal of labor-saving investments.



OK, so in Japan we see signs of accelerating cost pressures, and labor-saving investments are also on the rise. Is Japanese inflation (expectations) finally set to rise...?



Well, a principal components analysis on a number of measures of inflation, cost pressures and inflation expectations show that the inflation outlook is still muted.
That said, inflation is hardly a leading indicator and given the very real improvements discussed above, I still think it’s possible that Japan is on the cusp of a new inflation paradigm. If not now, when?


Get these posts delivered to your inbox

Sign up now to get an email every Friday with the latest research posts from Macro n Cheese

Sign up



We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.