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- Inflation, Japanese-style, at long last
Here is a high conviction prediction on Japanese monetary policy in 2023: Much ink, of the real and electronic kind, will be devoted on precisely how the Bank of Japan (BoJ) might follow its peers in exiting ultra-loose monetary policies. The BoJ’s longest serving governor, Haruhiko Kuroda, steps down on April 8th. There is little clarity yet on who will replace him. Meanwhile, the "shunto" spring wage talks between unions and Japan's leading firms will soon get underway, which tend to set the tone for employees' pay at smaller firms, too. The BoJ is the last hold-out among major central banks. Any monetary pivot would have enormous implications for global equities, bonds and currency markets, given the size of Japanese investment flows[1]. That was highlighted in December, when the BoJ stunned markets by broadening the trading band in which it allows 10-year government bond yields to fluctuate[2].
Since 1995, Japan’s unit labor costs have sharply declined compared to those in other developed economies
Sources: Organization for Economic Cooperation & Development (OECD), DWS Investment GmbH as of 2/1/23
Our Chart of the Week looks at the issue from a different angle. It compares trends between Japan and some of its peers in unit labor costs (ULCs). By measuring the average cost of labor per unit of output produced, ULCs implicitly capture both wage and labor-productivity dynamics, providing a broad measure of price competitiveness across different economies. Compared to rival producers, such as Germany or the U.S., which tend to compete in broadly similar goods, Japan has clearly been regaining ground. Our chart uses economy-wide ULCs since 1995. It highlights how severe and long-lasting the belt tightening has been for Japanese workers generally. Comparing Japanese ULCs with, for example, Spain’s during the painful austerity years following the Eurozone crises gives an idea of the sacrifices involved.
If you have regularly visited Japan since the heady days of the real-estate bubble bursting in the early 1990s, you are likely to be struck by how much cheaper both labor and land have steadily gotten. A lighthearted way to gauge the impact is to glance at the Economist’s recently updated Big Mac index[3]. A burger captures the costs not just of its ingredients, many of which, such as wheat and beef, are tradeable, but also indirect inputs, notably rent and labor, which are determined by local conditions. These help explain why the price of one burger in Switzerland now gets you more than two in Japan. Compared to the United States or the Eurozone, Japan’s burger discount is now a whopping 40%. Japanese employees bore the brunt of adjustment costs on the long way of regaining global competitiveness. “Now, this painful process may have ended so that wage adjustments can normalize in line with its peers,” argues Katrin Loehken, economist for Japan at DWS. “There are good reasons for the BoJ, whoever ends up heading it, to initially remain fairly relaxed, about the sort of wage-price spiral it has so long been vainly trying to get going.”
