Quick quiz: which developed-market country this week reported annual wage growth that was nearly three percentage points above inflation? Believe it or not, it was Japan. Workers in the one country most synonymous with deflation saw their pay packets grow by 3.6% in June, compared with last year. Price inflation – as measured by the consumer price index (CPI) – was just 0.7% in the same month. So that’s a real (after-inflation) pay rise of 2.9%. Not bad at all.
Now you can pick holes in the data, which is very volatile. The headline figure includes both summer bonuses and a big jump in overtime pay. Underlying earnings were up by 1.3%, the same as last month, notes Jonathan Allum of SMBC Nikko. But even taking those points into account, note that this is the sharpest rise seen since 1997. And it’s not the only sign of incipient inflation in Japan, notes Allum – wholesale prices are rising at a rate “not seen since the 1990s”.
Why should you care? First, it shows that, even in the apparently most stubbornly deflationary environments, price rises can take hold once the conditions are right. In Japan’s case, this has involved a virtually bottomless pit of money printing by the central bank, and an unemployment rate that has fallen to a tiny 2.4%. But the point is, it has started.
Second, it always takes a long time for investors to get over the last crisis. I think it’s fair to say that a majority of investors are still more frightened about the prospect of a repeat of 2008 – a deflationary debt-driven crisis – than they are about anything else. As a result, they pay a lot of attention to things that point in that direction (such as the sliding copper price and falling Chinese share prices) and far less attention to things that might contradict this narrative (such as surging Japanese wages, for example).
Yet as Karen Ward noted in the Financial Times this week, there is nothing inevitable about deflation. Recent decades saw several major changes that unleashed disinflation across the world, from China joining the global goods market to the internet’s role in keeping prices down. But not only have those trends arguably already peaked, but the shift in the political picture is actively reversing them. Tariffs will make Chinese goods more expensive. Tech companies are prominent – that is, highly taxable – targets for angry voters.
So it might be worth spending some time considering how a more inflationary world would affect your money. As Ward puts it: “Government bonds are unlikely to be the asset that will protect portfolios.” We’d suggest owning at least a little gold.