Japan’s Tight Labor Market Generates Deflation…

Yves here. This is intriguing. Paging the FOMC…

However, there is underemployment in Japan, if nothing else in the form of freeters, as in the precariat that does not have salaried work. This was a post-financial-crisis development designed to preserve overall employment levels at the expense of the quality of employment for some. So this suggests that the existence of a precariat class of employees serves the same function as higher levels of unemployment: it checks the ability of workers to ask for better pay and conditions even in the face of nominally robust employment.

By David Llewellyn-Smith, founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. Originally published at MacroBusiness

Just a quick observation today as Japan released its October unemployment rate at 2.8%, way below supposed full employment. Yet it’s still waiting for wage inflation to kick in, for about  twenty years now…

Japan is unique in some ways with its social contract between dead wood salarymen and other stabilising institutions, still as the leading indicator for our post-crisis developed economies it’s hardly irrelevant:

  • balance sheet recessions and their aftermath take generations to restore animal spirits for debt;
  • aging population;
  • advancing automation.

What it doesn’t have that other DMs do is inequality but that’s also a powerful deflationary force. Nor does it have a flood of cheap migrant labor which equally deflationary, especially when you’re already over-supplied.

Just sayin’, for all of you inflation hawks out there.

Looking at you, Bloxo, Boaky…

Print Friendly, PDF & Email


  1. Jim Haygood

    Japan’s labor participation rate receded about 6 percentage points from the early 1990s to 2012, then picked up a couple of percentage points since then — but still languishes about 4 percentage points short of where it was just after its 1980s bubble popped.

    This messed-up chart obviously cries out for seasonal adjustment, but the broad trend is apparent [click ‘MAX’ chart range]:


    Plenty of discouraged workers have dropped out of the US labor force too. Does the prospect of these idled ghost workers re-entering the labor force keep wages down? Can’t help, anyhow.

    1. John k

      Include the participation decline and unemployment doubles to 8%.
      Plus part timers that want full time.
      Fed sees an unsolvable mystery… higher rates will slash wages! Perfect…

    2. Synoia

      The whipping will stop when morale improves. I suspect there is a Geographical and housing cost elements to to Labor participation, and mobility of Labor.

  2. Synoia

    I was lead to understand it was the Zombie Banks which lead to deflation, clawing back every yen to make their books look good, and only “lending” at no risk, that is buying Government Bonds.

    Not a shortage of workers, which should cause wages to rise, and increase spending.

    So the convention wisdom that a worker shortage cause inflation is wrong? A worker shortage both causes inflation and deflation? Who could have known!

    Simultaneously causing both inflation and deflation is a economic concept well above my understanding, just thinking about it makes my brain hurt.

    1. epynonymous

      Inflation and deflation are confusing because they can refer to either prices or to monetary values. (aka, roughly the exact opposite of themselves. Barring real changes, ‘inflation’ adjusted, in the value of the goods on the market – for instance – the way televisions don’t cost what they used to.

      A worker shortage also means that there’s a demand shortage (especially important for long-term investments like housing) If the same housing stock can still house everyone, because the population isn’t growing, then it’s radically different than from here in the US.

      Japan imports alot of it’s raw resources, but because their base-cost is high, their craftsmanship is much higher. So everything is expensive there and quality compared to the US market.

      Interestingly, I googled their population stats myself, and the site spontaneously pulled up a chart showing Russia’s population growth, which is similarly static (although in Japan, aging is a major factor as well.)

  3. JohnnyGL

    It’s worth pointing out that it’s literally been decades since anyone has seen nominal wage hikes in Japan. I’m saying this from a vague understanding of the stats, not personal knowledge, to be clear. Happy to be corrected.

    If you’ve been in the workforce for 2 decades and NEVER gotten a nominal raise (just small boosts from deflationary pressures), I’d figure it’s pretty well baked into the broader culture at this point, job insecurity would just help reinforce that kind of thing, as would cultural norms which value conformity over individuality.

    I’d guess you’d need a long, sustained period of the economy burning white-hot for years before nominal wages started to edge upwards.

    1. sgt_doom

      Somewhat similar to the USA, where workers averaged a total compensation increase of 0.47% from 1985 to present, as opposed to Denmark, which experienced a 220% increase. Japan and the USA in similar situation, and both offshored jobs and tech to China.

    2. Jon S

      Remember that Japan sits just a hop and skip across a pond from China. Japanese wages are likely to converge with Chinese wages over the next couple of decades. They’re just in a holding pattern until that happens.

      1. MyLessThanPrimeBeef

        I think you’re right to look at China’s role in this.

        Many Chinese students can travel to Japan to study.

        1. Jason v

          Plenty travel there to work as well. When I was in Japan in 2017 I spoke mandarin with employees at convenience stores, hotels, shopping malls…

  4. The Heretic

    Remember that Japan has a huge number of part time/contract labour… something on the order 20-30%…. feeling unsafe about your job, plus a very high cost of living, would be very deflationary for ones ego, and hence the deflated consumption paterns and animal spirits.. Japan is fortunate in that the social manifestation of this malaise is still peaceful such as the Otaku and not oxycontin consumption or rightwing nationalism.

    1. FDW

      Actually, there is a fair chunk of the Otaku community that is rightwing nationalist (though I would also that there’s an even stronger Anti-establishment streak there too.). Shintaro Ishihara ain’t all that different from 45.

  5. The Heretic

    Some more info from bloomberg… much more contemporary data. Ignore the headline, just look at the first bar chart and you realize the situation is still very bad…

  6. TG

    Indeed, but don’t forget, that you can’t judge Japan’s economy by our standards.

    They have a roughly stable population. That means that the economy doesn’t need to grow at all to maintain the status quo, while a country like the United States needs massive ongoing growth and capital investment and continual refurbishment of the entire industrial base just to stay level.

    Looking at Japan’s purchasing power power per capita, the trend does not look bad.


    And at the personal level consider this: A Japanese with national health care, no student loans, who owns his/her own home. Compared to an American with big insurance premiums and still massive outlays for health care, massive student loans, and massive loans for a mortgage or massive rent costs. You need to look at more than just GDP to figure out who is better off.

    Indeed Japan has problems – mostly the very high population density due to pre-WWII population policy – but the notion that they would be better off turning themselves into another Bangladesh is absurd.

  7. Collins

    “Japan is unique in some ways with its social contract between dead wood salarymen and other stabilising institutions..”

    And the American Tech billionaire proposal of Universal Basic Income with legalized Marijuana to pass the time is preferable?

  8. Catsick

    As somebody based in Tokyo, I see wage inflation really starting to bite, hotels and restaurants are really having to fight for staff, I know of places that have raised hourly rates by 50 percent, jobs that used to be 750 yen an hour are now 1500, I know of a hotel operator who had to delay opening a hotel by 3 months due to staffing issues, getting building work done it also tough, hard to even get a quote now, the olympics is far from helping on this front! Out in the countryside things are not as crazy but I am pretty sure in 5 years there will be real inflation and much higher wages …

  9. schultzzz

    I lived in Japan for a minute, and my friends were pretty scared of blacklisting.
    I’m not sure *how* the blacklist works, but apparently if you’re a temp and quit before your contract is up, you get blacklisted from all temp agencies?

    City and federal govt also spend a lot on back-breaking and not-necessary construction jobs to keep unemployment down. To remind the citizens that the government isn’t wasting their taxes, the officials have the laborers do the work in the middle of the most crowded streets where everyone can see it, endlessly.

  10. Karen

    Would be more informative to see a graph of total yen paid out to all employees, divided by total population. That makes more sense to me as a measure of inflation risk than any official unemployment rate. The unemployment rate is a good proxy only if neither the jobs pool nor the labor pool changes in any material way.

    And I’m no expert, but I’ve read that inflation is like climate change in that there is a significant delay between cause and effect. The delay tends to be greater in societies that are unaccustomed to inflation (Japan would certainly seem to fall in that category) than in those that have recently “been there, done that” like Argentina.

Comments are closed.