December 26, 2014, 17:00 JST

Japanese workers need to bargain harder for higher wages

Among the torrent of data releases today, we saw a number of positive elements. First of all, it was reassuring to see that the labor market in Japan started to tighten again. The job offers to applicant ratio stopped rising in mid 2014, but it resumed its climb in October and it rose to 1.12 in November, the highest ratio seen in Japan since May 1992.

 Source: MHLW, JMA

Industrial production in November itself was a disappointment, declining by 0.6% from October. However, manufacturers published an unusually robust production plans, proposing to expand their production by 9% accumulatively in December and January. We are starting to hear anecdotal stories indicating an emergence of upward momentum in exports and private capital expenditure. The robust production plan serves as an supporting evidence that the weak yen is finally encouraging larger production in Japan. 

 Source: METI, JMA

On the other hand, there are some seeming setbacks to the reflation story in Japan. There is a clear disinflationary trend in the CPI and it is not just energy. The rate of inflation in the core CPI, excluding food and energy, is also trending down. 

 Source: MIAC, JMA

Should we, or perhaps more importantly, should the BoJ, be concerned? If deflation coming back to Japan? 

We do not think so. The recent disinflation trend is caused by a combination of two factors, the slackening in the economy due to the sales tax hike in April and the decline in international commodity prices. Fortunately for Japan, the former factor seems to be waning off. Recent economic indicators suggest that Japan has already exited from the recession it fell into this year. The lower commodity prices should be considered as a boon to the Japanese economy and while it may lower the inflation in 2015, it will at the same time raise consumers' real purchasing power and fatten up corporate profits. A lower inflation due to a lower energy price should pose little concern for the BoJ. 

There is one important negative news to the reflation story though. The wage growth in November was very disappointing. Despite the tightening in the labor market, there is no visible wage inflation. In fact, the total wages including special bonuses fell by 1.5% year on year (YoY) in November. When the inflation is taken into account, the real wage fell as much as 4.3% YoY, the worst decline since June 2009. The regular wage, basic plus overtime wage, did manage to grow positive YoY in November, but the rate of growth was a paltry 0.1%. The lackluster wage growth is disturbing.

 Source: MHLW, JMA

We think it is matter of time that we start to see an acceleration in wage inflation though. The job market condition is clearly in workers' favor, and as it becomes harder to fill vacancies, hiring managers will have to bid up wages to attract workers. The last time when the job offers to applicant ratio was this high, the wage growth was over 2% YoY. 

As baby boomers retire, Japanese work age (15-64) population is shrinking at the rate of around 1% every year between 2012 to 2016. Any economic growth in Japan will lead to a tightening in Japan's labor market. In our forecast, the unemployment rate will fall to 3% by the end of 2015, and wage inflation should exceed 1% in the next 12 months. 

All in all, we see the economic conditions become favorable for higher growth in Japan in 2015.