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The Japanese Economy: Topic of The Month

1) While Japan's job openings to applicant ratio recently hit its highest level since the 1970s, nominal wage growth remains close to 0% annually, leading to the view that wages are not rising despite labor shortages. 2) However, there is a positive correlation between labor market tightness and wage growth, indicating that wage increases currently match levels predicted prior to Abenomics based on historical trends. 3) The perception of stagnant wages comes from comparing current conditions to Japan's bubble era when tighter labor markets saw steeper wage growth. To achieve full economic recovery, improving productivity will be necessary to sustain stronger wage increases.

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95 views2 pages

The Japanese Economy: Topic of The Month

1) While Japan's job openings to applicant ratio recently hit its highest level since the 1970s, nominal wage growth remains close to 0% annually, leading to the view that wages are not rising despite labor shortages. 2) However, there is a positive correlation between labor market tightness and wage growth, indicating that wage increases currently match levels predicted prior to Abenomics based on historical trends. 3) The perception of stagnant wages comes from comparing current conditions to Japan's bubble era when tighter labor markets saw steeper wage growth. To achieve full economic recovery, improving productivity will be necessary to sustain stronger wage increases.

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abra
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MHRI Brief June 14, 2017

The Japanese economy: topic of the month

Is Japans wage recovery really tepid?

Yusuke Ichikawa, Senior Economist, Economic Research Department

The ratio of job openings to applicants rose to 1.48 in April, surpassing the peak during Japans bubble
economy (1.46 in July 1990) and recording the highest level since February 1974 (1.53). On the other hand,
nominal wage growth is still close to +0% y-o-y, giving rise to the widespread notion that wages are not rising
despite the labor shortage.
However, even though it is difficult to discern from monthly headline data, the mechanism transmitting
labor market tightness to the rise of wages is still functioning. If we put the openings-to-applicants ratio
(representing labor market tightness) on the horizontal axis and hourly wage growth on the vertical axis, we find
that there is a positive correlation between the two (Chart 1 left panel). This correlation (the Phillips curve using
the openings-to-applicants ratio) shows that the current rate of wage rise matches the level forecast on the basis
of the trend prior to Abenomics (pre-Abenomics), and that the strength of recovery would be assessed as
normal. The impression that wages are not rising stems from fact that the high openings-to-applicants ratio
brings about a deja vu of the bubble period, when the correlation between the labor tightness and wages was
stronger, i.e., that the slope of the line was steeper (Chart 1 right panel).

[ Chart 1: The openings-to-applicants ratio and the rate of wage growth ]

8 8
(Hourly Wage Growth

Pre-Abenomics (2005Q1-2012Q4) 1985Q1-1993Q4


(Hourly Wage Growth

6 Abenomics (2013Q1-2017Q1) 6

PreAbenomics
4 Trend 2017Q1 4
%)

2 2
%)

0 0
2017/4
-2 -2

-4 -4
0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6
(Openings-to-Applicants Ratio) (Openings-to-Applicants Ratio)

Source: Made by MHRI based upon the Ministry of Health, Labour and Welfare, Monthly Labour Survey, Employment Security Bureau
Report on Employment Service

1
MHRI Brief June 14, 2017

While the weaker correlation between the two requires further analysis, the absence of a significant change
in the slope after the start of Abenomics implies that labor market tightness alone may not lead to a strong rise of
wages. In order to achieve a full-fledged recovery, it would be necessary to secure the source for wage hikes
through the improvement of productivity.

This publication is compiled solely for the purpose of providing readers with information and is in no

way meant to encourage readers to buy or sell financial instruments. Although this publication is

compiled on the basis of sources which we believe to be reliable and correct, the Mizuho Research

Institute does not warrant its accuracy and certainty. Readers are requested to exercise their own

judgment in the use of this publication. Please also note that the contents of this publication may be

subject to change without prior notice.

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