The Key to Overcoming Japan’s 30-Year Deflationary Trend Lies in Raising Wages

The Kishida Cabinet aims to break free from deflation with a substantial supplementary budget of 13 trillion yen, emphasizing the necessity of a “positive cycle of wage increases and price hikes” to make the effort more robust. The Fair Trade Commission also declared that, in order to enable small- and medium-sized enterprises struggling with wage increases to pass on rising labour costs to product prices, refusing price negotiations would be considered a violation (abuse of a dominant position) and would be subject to guidance and monitoring.

The Bank of Japan (BOJ) shares the view that elimination of the negative interest rate policy, symbolic of deflation, will be challenging until a positive cycle of wages and prices is realized. The BOJ has expressed a desire to assess the upcoming spring wage negotiations before considering the policy’s removal.

In essence, the wage increase in the upcoming spring labour negotiations has become a significant policy goal for Japan. Attention is focused on the wage increase rate surpassing the inflation rate, with the consumer price index for October standing at 2.9%. Consequently, a wage increase of over 5% is deemed necessary, and the Japanese Trade Union Confederation (RENGO) decided at its central committee meeting on December 1 to demand a wage increase of over 5%, consisting of a basic raise of over 3% plus the regular wage hike based on seniority.

Japan Council of  Metalworkers’ Unions, leading the spring labour negotiations, has proposed a record-setting base pay increase of 10,000 yen, equivalent to 3%, and when combined with a 2% regular pay raise, the total becomes 5%.

Labour Force Survey Monthly Results¹

The labour market in general has been on a tightening trend amid labour shortages, as the economy continues to recover from the coronavirus pandemic.

(1) Employment

The number of employed persons in October 2023 was 67.71 million, an increase of 160,000 over the same month the previous year. By gender, this included 37.08 million men, up 60,000, and 30.63 million women, up 100,000 from the previous year.

(2) Unemployment

The number of unemployed persons in October 2023 was 1.75 million, a decrease of 30,000 from the same month in the previous year.
The seasonally adjusted unemployment rate in October was 2.5%, down 0.1 from the same month the previous year. The unemployment rate was 2.6% for men, down 0.2, and 2.5% for women, up 0.3 from the same month the previous year.

Units: 10,000 persons

(3) Job Availability

Japan’s job availability in October stood at 1.3, up 0.01 over the previous month. This ratio means there were 130 job openings for every 100 job seekers.
The ratio of regular employee job offers to applicants was 1.01, down 0.01 from the previous month.
The ratio of new job offers to applicants, a leading indicator for the labour market, was 2.24, up 0.02 over the previous month. The number of new job offers decreased 1.8% from the same month the previous year. By industry, the education and learning support sector rose at 3%, followed by the accommodation and food services sector at 1.3%. On the other hand, the manufacturing sector dropped 10.6%, while the construction sector sank 6.2%.

Industrial Production²

Industrial Production Fluctuates Indecisively
Industrial output in October increased 1.0% over from the previous month, rising for the second consecutive month. Production, shipments, inventory ratio, and inventories all increased. The industries that mainly contributed to this increase were as follows: (1) electronic parts and devices; (2) motor vehicles; and (3) electrical machinery and information and communication electronics equipment, in that order.
According to the Survey of Production Forecasts in Manufacturing, production was expected to decrease 0.3% in November and increase 3.2% in December.

October 2023                                                           2015 average = 100

Family Income and Expenditure Survey³

(1) Expenditure of Households of Two Persons or More

Average monthly consumption expenditure of households of two or more persons in October was 301,974 yen, up 1.3% in nominal terms and down 2.5% in real terms from the previous year, declining for the eighth consecutive month. By component in real terms, spending on furniture & household utensils fell 12.9% and clothing & footwear fell 9.7%. Education rose 10.6% and transportation & communication rose 5.3%.

(2) Income and Expenditures for Workers’ Households

Average monthly income per household stood at 559,898 yen, down 1.5% in nominal terms and down 5.2% in real terms from the previous year, due to higher inflation rates. The average level of consumption expenditure was 330,590 yen per month, up 0.6% in nominal terms and down 3.2% in real terms year-on-year.

Consumer Prices⁴

The consumer price index (CPI) in October was 107.1 (2020 = 100), up 3.3% over the previous year and up 0.7% over the previous month. Core inflation (CPI less food and energy) was up 4.0% over the previous year and up 0.1% over the previous month, marking the nineteenth straight month of increase, but slowing slightly from a 4.2 percent rise in September. Energy prices dipped 8.7%, as electricity bills fell 16.8% due to the government’s subsidization of utility bills for consumers. Food prices (excluding volatile fresh items) rose 7.6%. Egg prices surged 28.3% amid bird flu-related supply concerns. Tomato prices surged 41.3% due to hot weather and accommodation fees jumped up 42.6% with the continued recovery of travel demand following the return of foreign tourists to Japan.

October 2023

1. 1. Source: Labour Force Survey Monthly Results (Statistics Bureau of Japan)
   (https://www.stat.go.jp/english/data/roudou/results/month/index.html)
2. 2. Source: Indices of Industrial Production (Ministry of Economy, Trade and Industry)
   (https://www.meti.go.jp/english/statistics/tyo/iip/index.html)
3. 3. Source: Summary of the Latest Month on Family Income and Expenditure Survey (Statistics Bureau of Japan)
   (https://www.stat.go.jp/english/data/kakei/156.html)
4. 4. Source: Consumer Price Index (Statistics Bureau of Japan)
   (https HYPERLINK “https://www.stat.go.jp/english/data/cpi/1581-z.html” HYPERLINK “https://www.stat.go.jp/english/data/cpi/1581-z.html“://www.stat.go.jp/english/data/cpi/1581-z.html)