Something unusual is happening in the Japanese economy


Something unusual is happening in the Japanese economy.

While the national unemployment rate, at 2.5%, currently sits near the lowest level in three decades, inflationary pressures are not responding.

Indeed, as seen in the chart below from Credit Suisse, not only is underlying inflation not picking up as the economic textbooks say it should, but it’s actually starting to weaken.


Usually, when unemployment falls, pushing up wage pressures, inflation tends to accelerate.

But not in Japan in 2019.

For the cricket fans out there, the Phillips curve has done a “doosra,” or gone the other way.

Despite renewed signs of disinflation — even with super-tight labour market conditions — the Bank of Japan (BoJ) still sees underlying inflation returning gradually to its 2% target over the coming years.

But not everyone agrees with the BoJ’s optimism.

“We continue to believe that the Bank remains too optimistic about its inflation projection,” says Hiromichi Shirakawa and Takashi Shiono, Economists at Credit Suisse.

“In addition to the fact that a simple Phillips curve remains flat or even inverted-shaped of late, we anticipate the prospective VAT hike [in October this year] to have a rather meaningful downward impact on retail prices into 2020.

“In this context, we foresee the Bank likely to revise down its inflation forecasts sequentially into the late autumn [in the northern hemisphere] unless the Japanese yen depreciates meaningfully.”

Looking ahead, Credit Suisse says it expects the BoJ “to go nowhere for the rest of the year, leaving the policy rate targets unchanged while sticking to gradual tapering of JGB purchase amounts”.