Rising wages may bring surprises in Japan

Wages are rising in Japan. That doesn’t necessarily mean the Bank of Japan will end its monetary stimulus. But it does open the door to surprises, says Merryn Somerset Webb.


A shortage of labour drives up wages. Seems obvious doesn't it? If you want something and there isn't much of it about, you will have to pay more for it than if it were in plentiful supply.

The problem with the theory over the last few years has been that despite very low unemployment rates in countries such as the UK, the US, and in particular Japan (where the jobless rate is a stunningly low 2.5%), wages haven't been rising much.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

But the latest numbers from Japan suggest that might now be changing. According to today's estimates, (preliminary) cash earnings jumped from a 1.0% year-on-year rise in February to 2.1% in March rather more than the consensus estimate of 1%.

It isn't completely straightforward much of the rise came from bonus payments, which are obviously volatile. But, overall, the strength in the numbers was pretty broad-based, says Capital Economics: the 1.8% year-on-year rise in overtime pay was the highest it has been since November and the 1.3% increase in base pay marked the strongest rise since 1997. Note, too, that "these strong wage gains are even more impressive once we take into account that working hours fell by 1.4% year on year".

Advertisement - Article continues below

The analysts at Pantheon Economics are excited too. They point out that the composition of the labour force has changed a little, too: there are more permanent workers generally paid more inflating the average, and temporary workers appear to have begun to be turned into employed part-time workers (better for them).

Everyone agrees that these numbers are so high that they are likely to be revised down over the next few month. But, nonetheless, says Pantheon, there appears to have been a "positive reset" to wages: "these data provide further evidence that the BoJ's long-awaited wage-price spiral is off the ground." So much so that it might be time to stop referring it as "nascent" and start considering it established.

This doesn't necessarily mean that the Bank of Japan will be tightening monetary policy in the immediate future. But it does signal significant change and that opens the door to surprise.

What if the surprise of 2018 were twofold? First, that supply and demand work as they should on prices (something some economists were beginning to doubt) and second that this dynamic leads to the end of monetary stimulus in Japan sooner rather than later?




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019
Global Economy

Have we reached the end of the road for petrol cars?

The prime minister has said that all new sales of vehicles with internal combustion engines will be banned from 2035. Is that achievable?
15 Feb 2020
Global Economy

The charts that matter: markets don’t know which way to turn

With investors continuing to worry about the coronavirus and the threat of higher inflation in the US, John Stepek looks at what that's done to the ch…
15 Feb 2020

Most Popular

Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
UK Economy

Britain’s economy might spring a surprise on the doomsayers this year

The UK economy is looking pretty good – we’re more at risk of a boom than a bust, says John Stepek. Here’s why, and what it means for your portfolio.
20 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019