As the reality sets in – the US has few options in dealing with the 33-year-old renegade leader in North Korea – there is a positive silver lining for Japanese stock investor, CLSA’s Christopher Wood observes in a September 7 report. But these are not the only positives in Japan. As a labor shortage surfaces, befuddling economists who note that wage growth continues to remain anemic along with nowhere near two percent target inflation, it looks like automation could come to the rescue.

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Two Percent Target Inflation
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US policy in North Korea shifting to containment as Japan looks to militarize

Increasingly the US options with North Korea are being realistically pared.  Among the only “real” options that could cripple the missile firing, nuclear testing renegade, China shutting off the oil supply to the regime, does not appear to be in the cards. China appears unwilling to go along, leaving the US and its tough talk twisting in the wind.

The limited options are detected by Wood as he examines public statements made by former Obama and Bush National Security Advisors Susan Rice and Condoleezza Rice respectively. They are recognizing the limited options and the strategy on North Korea may be shifting. No longer is stopping the regime from obtaining nuclear weapons with the power to reach the US west coast a probable outcome. It is more about containment.

For Japan’s Prime Minister Shinzo Abe, who has been hawkish on defense and reform of the constitution, which prohibits a military build-up, the North Korean dust-up has been a net positive. Before scandals ravaged his popularity, his approval was 66% in January, according to Nikkei polls. That dropped to 39% in July but has since grown to 46% in late August, potentially on the back of a defensive posture needed to discourage North Korea from taking liberties in the region.

A military shock might jolt the price of oil higher, bringing two percent target inflation to Japan

One issue that could bring to life comatose inflation in the region, well below its two percent target target, might just be volatility resulting from an oil price jump or collapse of the yen.

“No one expects the two percent target inflation  to be reached save for some dramatic short-term spike caused by a macro shock,” Wood wrote.

Shock is what it might take to get economic indicators in line with each other. Take wages in the region. Despite evidence of a tighter labor market, Japanese wages, much like those in other developed world regions, have been stagnant. Looking at soaring job-offers-to-applicants ratio, at their highest level since 1974, something is obviously missing: both wage growth and two percent target Inflation.

Part of the wage issue in Japan is that unions representing workers have an incentive not to increase wages but make certain those jobs remain permanent, with benefits accruing for 60% of the workforce.

Japanese companies, meanwhile, have started to eliminate employing people in unnecessary jobs. The practice, known as omotenashi, is particularly prevalent in the services sector, with Wood pointing to the example of female lift attendants in department stores. With females in the Japanese workforce now rising to US levels, near 65%, creative solutions are required.

To battle the problem of a worker shortage, Japan is turning to technology that can automate once human work flows. Ultimately this could transfer into wage growth that also might result in two percent target inflation flashing signs of economic life. Japan is also moving to allow foreign workers to enter targeted job markets, mostly involving farming.

“The theoretical hope is that reform of labour practices, be it introducing automation or ending unnecessary tasks, will increase labour productivity which in due course will lead to rising real wages,” Wood writes.

Hopefully, Japan does not repeat the mistake of Europe.