- Annual wage growth in Japan has fallen in real terms in each of the past three months.
- That appears to be impacting household spending which fell heavily in the year to February.
- Falling real wages are crimping the purchasing power of households, placing downside pressure on consumption and inflationary pressures.
Japan’s unemployment rate currently sits at 2.5%, just off the multi-decade low of 2.4% struck earlier this year.
There’s also no shortage of jobs to fill with the nation’s jobs-to-applicants ratio — simply measuring the number of people seeking work to number of jobs available — also sits just off a multi-decade high at 1.58.
Put another way, there’s currently 1.58 jobs available for every person looking for work.
Great odds, right?
From a supply and demand perspective, it points to a labour market that’s not only hot but scolding hot.
There’s heaps of jobs available but few workers to choose from, something that would usually lead to an explosion in wage growth.
However, Japan, like so many other major developed economies right now, is discovering that the relationship between unemployment levels and wage growth isn’t the same as it was in the past.
While unemployment is incredibly low, so too is wage growth.
It’s so low, in fact, that it’s actually going backwards in real, inflation-adjusted terms.
According to data released by Japan’s Labour Ministry, real worker wages fell 0.5% in the 12 months to February, a marginal improvement on the 0.6% contraction in the year to January.
In nominal terms, average monthly wages stood at 261,319 yen, an increase of 0.9% on 12 months earlier. Including special payments, total cash earnings rose by 1.3% to 266,466 yen.
Over the same period, Japanese consumer price inflation (CPI) rose by 1.5%.
Not only is weak wage growth making the Bank of Japan’s task of lifting CPI back to its 2% target all the more difficult, helping to explain why it continues to implement quantitative easing as other major central bank’s lift interest rates, but there’s also signs that it’s weighing on household consumption, the largest part of the Japanese economy at around 60%.
In separate data released on Friday, the government reported that household spending shrank 0.9% in the year to February, the largest decline over a comparable period since April last year.
Markets had been expecting an increase 0.3% following a 1.9% gain in year to January.
“The pick-up in consumption seems to be stalling,” a government government spokesperson said following the data release.
Analysts told Reuters that unusually cold weather kept consumers at home during February while heavy snow led to a spike in vegetable prices, discouraging households from spending on non-necessities.
Still, even driven by temporary factors this month, falling real wages is eroding the purchasing power of Japanese households, making it more difficult for firms to pass on higher prices.
Until real wages begin to increase in a meaningful and sustained manner, recent trends point to downside risks for both consumption and inflationary pressures in the period ahead.
On those grounds, it looks like the BoJ will be buying a few more bonds yet.