One bank opines that a tight Japanese Labor Market will depress inflation for Years, while another says FOREVER
As the Eurozone is still struggling to deal with its chronic unemployment problem, on the other side of the world Japan’s labor market is very close to overheating. The country is nearing full employment, with the ratio of job offers to applicants standing at its highest level in 43 years, a trend which should lift wages and spur price hikes, igniting inflation and hopefully bringing an end to Japan’s economic stagnation.
The ratio of job openings to applicants hit 1.48 in April, the highest level in 43 years on a seasonally adjusted basis. Meanwhile, the ratio of full-time job openings to applicants came in at 0.97, the first time it’s ever been close to surpassing one. In April there were 34 million full-time workers, a jump of 140,000 year-on-year. That marks 29 straight months of year-on-year gains for regular workers as supermarkets and other retailers continue to switch from part-time to full-time staff. The unemployment rate for the country is 2.8%, a figure of less than 3% means Japan is nearing full employment – all of this despite a rapidly aging population.
Nonetheless, despite the tighter labor market, wage growth has been anemic. Fixed wages only increased by 0.5% year-on-year during April, only a fraction of the 4% pay growth recorded during Japan’s 1980’s-90s boom.
Tight Japanese Labor Market Leads to inflation woes
Some analysts believe that this combination of low unemployment and stagnating wages masks a worrying underlying trend. Most of the jobs being created are temporary and pay very little, which is hardly good news and is unlikely to reignite Japan’s economic prosperity.
These warnings have poured cold water on investors’ hopes that Japanese companies may see a surgeon profitability as wages rise. Tight Japanese labor market trends have led to “increased investor uncertainty over the sustainability of Japanese economic growth.”
However, the report then goes on to speculate that perhaps the picture isn’t as bad as many suspect. Specifically, analysts at Macquire believe that Japan’s sluggish wage growth can be attributed to the over-hiring of regular employees during the period 1982 to 1992 “which proved excessive, in our opinion.” This period was one of labor scarcity, which drove wage growth to 4% per annum. Several decades later and the bulk of these employees, hired at 22, are now reaching retirement age. As Japanese companies tend to avoid staff cuts at all costs, instead preferring to sacrifice profit rather than people, it will take some time for overstaffing to work its way out of the system and margins to expand. This may not be good news for the labor market in the short term, but over the long term Macquire argues that investors will benefit.
The bank estimates that the effective reservoir of underemployed regular workers is equivalent to over 10% of Japan’s workforce, and this reservoir is “currently absorbed in non-core subsidiaries.” As this workforce retires, and managers shut down these underperforming entities, capital efficiency and labor productivity should improve. As a result, over the next ten years a shrinking workforce should lead to both “higher ROEs and employees’ real wages”, a “medium to long term bullish factor for Japanese equities.”