Japan sees inflation at 4% but real wages falling at 4% too

by Shaun Richards

Today we look at the land of the rising sun or Nihon because more than a few of our themes are in play. We can start with something from yesterday.

Tokyo’s inflation outpaced forecasts to hit 4% for the first time since 1982, suggesting the underlying price trend is stronger than thought by economists, a factor that could further fuel speculation the Bank of Japan will adjust policy again.

Consumer prices excluding fresh food climbed 4% in the capital in December as processed food and energy costs continued to mount and a majority of tracked items got more expensive, according to the ministry of internal affairs on Tuesday. Economists had forecast a 3.8% rise. ( Bloomberg)

For some reason Bloomberg ignore the fact that the forecasts are regularly wrong. But for our purposes the issue is that Japan not only has inflation but it is now running at a rate twice that of the Bank of Japan target. The irony that it has only happened after Abenomics ( whose 3 arrows were supposed to achieve it ) and more sadly Abe san himself have ended. But according to the original statement from 2013 the Lost Decade is now over.

These effects will support the positive movements that have started to appear in economic activity and financial markets, contribute to a further pick-up in inflation expectations that appear to have risen, and lead Japan’s
economy to overcome deflation that has lasted for nearly 15 years.

Of course by now that more like 25 years although best of luck with arguing it is now over. Japanese workers and consumers can now list inflation as one of their problems as this will be quite a shock to them as many prices were effectively unchanged for years.

“December’s jump in Tokyo core inflation to 4% bodes ill for consumer spending in the fourth quarter of 2022. Japan’s inflation started as a cost-push phenomenon fueled largely by higher import prices but is spreading to services including hotels and taxis,” Bloomberg economist Yuki Masujima said.


These have been another feature of the Lost Decade experience.

TOKYO, Jan 6 (Reuters) – Japan reported on Friday its worst real-wage decline in more than eight years, with November data highlighting the elusiveness of the central bank’s objective of reinforcing inflation and the economy with sustained rises in workers’ pay.

Worryingly wage growth itself fell.

Nominal total cash earnings were up an annual 0.5% in November, but the pace of growth slowed from a revised 1.4% gain seen in October, led by falls in special payments such as bonuses.

Which meant this.

November was the eighth straight month to show an annual fall in real wages, which were undercut by inflation. The month’s 3.8% fall was the greatest since a 4.1% drop seen in May 2014, when real wages had been affected by rises in sales tax, the labour ministry said.

If we look at the official real wages index it was at 100.6 in 2021 so only a vary marginal rise on the 2015 base. The annual growth rate started 2022 at 0.5% which is high for Japan but has been singing along with Alicia Keys since then.

Oh, babyI, I, I, I’m fallin’I, I, I, I’m fallin’Fall, fall, fall (sing)Fall

The Japanese owned Financial Times suggests the times they are a changing this morning.

Fast Retailing, Asia’s largest clothing retailer and owner of the Uniqlo fashion brand, will increase employee wages in Japan by as much as 40 per cent as inflation in the country rises at its fastest pace in decades. The sharp jump in pay follows Prime Minister Fumio Kishida’s calls on Japanese businesses to raise wages that have remained stagnant for decades, with companies struggling to transfer higher costs to consumers.

As to what will be paid here are some examples.

As a result of the revision, starting monthly pay for university graduates will increase to ¥300,000 ($2,270) from ¥255,000, while salaries for new store managers will rise from ¥290,000 to ¥390,000.

How will it be paid for? One route is via the productivity fairy.

Fast Retailing had already raised wages by an average 20 per cent for most of its part-time employees in September. Combined with the latest increase for full-time employees, total personnel costs will rise about 15 per cent from a year earlier, which the company said would be absorbed by boosting productivity.

How can a retailer do that without sacking quite a few staff. Anyway I think we get a better clue here.

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To address the higher costs, the group increased the prices of flagship products at Uniqlo stores in Japan last year, with its fleece jackets jumping from ¥1,990 to ¥2,990.

So the pay rises are necessary to buy their own products?!

Returning to the issue of wage prospects I see something of a hardy perennial.

That has increased expectations for the traditional shunto wage negotiations in the spring, with the government calling on businesses to increase pay to compensate for higher prices. In a sign of changing times, the Japanese Trade Union Confederation is seeking a 5 per cent year-on-year increase in wages this year, or 3 per cent in terms of base pay, the highest rise since 1995.

The numbers are indeed higher this year. But for newer readers it goes like this. Japanese unions demand higher wages and the government supports them and the western media reports it. Then it does not happen ( see the wages figures above) but the media analysis heads elsewhere. I understand why the Japanese owned Financial Times might do this but the others are more confusing.

Actually even in this piece the FT is preparing the ground for later disappointment on wages growth.

Goldman Sachs expects a wage bump of about 2.5 per cent for the spring negotiations, the highest since the late 1990s but short of the 3 per cent wage growth the Bank of Japan has called for to sustain its 2 per cent inflation target.

Even a 3% rise would be below the present rate of inflation. Although if lower world energy prices persist the inflation situation may well be better by then.

Also we can link one of our other topics which is the Yen. As the end of tear rally will have helped a bit with this.

Hisashi Yamada, vice-chair of the Japan Research Institute, said large companies with a global presence were struggling to acquire international talent with Japan’s average pay at the lowest among G7 countries, according to OECD data. “With an increasingly fierce labour shortage, there is a widespread sense of crisis among the management,” said Yamada.

That raises another problem for Bank of England Chief Economist Huw Pill and hos argument that it is a consequence of Brexit that the UK has a labour shortage.


We can switch from the now traditional misrepresentation of the situation around Japanese real wages as we note the situation presently is as bad as it has been. We can move onto the money supply where in the Wall Street Journal Steve Hanke has claimed this.

But the interpretation of Japan’s monetary policy as “ultra-loose” is wrong. Tokyo has endured ultra-slow monetary growth for decades. From the bursting of Japan’s financial bubble in 1992 to the onset of Covid in 2020, the growth rate of the country’s money supply has averaged an anemic 2.6% per year. Today it hovers close to that rate, at 3.1%.

As there are several different types of money supply I wondered which one he meant. But the article does not say. It was easy for me to figure out as it had to be broad money, But Mr. Hanke either does not understand Japan or is only producing part of the story.

You see if we look at the monetary base which is what Abenomics aimed to pump up this did happen. The annual growth rate reached 55% in 2014 as the Bank of Japan began its metamorphosis into The Tokyo Whale. It is a bit hard to call that ultra-slow don’t you think? Since the start of Abenomics the monetary base is around 4 times larger so it is a bit rich to say policy has been ultra-tight.

The issue here should be familiar to my readers. You can have monetary policy as loose as you like but if the banks do not lend then broad money growth will struggle. Or as broad money is really more a feature of money demand than supply the Japanese have only themselves to blame in a way. For those of you who studied economics this is a real world example of monetary policy pushing on a string.


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