Japan is discovering that even the tightest labor market in a generation is no quick spur for higher wages.
That’s an ominous warning for central banks and governments elsewhere who are grappling with how to translate surging corporate profits into rising salaries, a dynamic that remains missing even as around 75 percent of the globe enjoys an economic upswing.
The Bank of Japan on Tuesday left its massive monetary stimulus program unchanged and lowered its inflation forecasts, blaming in part a deeply entrenched attitude among firms and households that prices won’t rise. That’s even with an unemployment rate below 3 percent.
For a microcosm of Japan and the world’s wages riddle, take a look at Fukui, a rural prefecture of about 780,000 people. The jobs-to-applicant ratio there stood at 1.98 in September, the second highest in the nation after Tokyo. Yet monthly wages there are falling this year, according to government data through August.
“Despite the very tight labor market, wages are refusing to rise in Japan,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. “We still have a lot of women and elderly members of the population who are yet to join the work force, and when they do join it increases the number of workers with lower wages.”
The BOJ’s struggle to hit its 2 percent inflation target is a vivid reminder of the limits of monetary policy. It also adds to a debate that the Phillips Curve, which asserts a link between unemployment and inflation, is no longer the guide it once was.
“This is being discussed intensely not only in Japan but in other nations,” BOJ Gov. Haruhiko Kuroda told reporters Tuesday after the decision. He said corporate sentiment needs to improve further before executives start to spend more. “When their future growth outlook improves, they will invest, hire people, raise wages and prices. We are not there yet.”
Japan was the first central bank to introduce quantitative easing after its economy collapsed under a stock market and real estate bubble in the early 1990s. Others, including the Federal Reserve and European Central Bank, were forced to follow the policy in the wake of the 2008 global financial crisis. The BOJ has doubled down on its massive asset purchase program in an attempt to shove inflation to a 2 percent target.
So far, that ambition remains elusive.
Izumi Devalier, Bank of America Merrill Lynch’s head of Japan economics, said the nation’s battle to spur wages and inflation raises questions for other economies and underscores the importance of providing enough stimulus. “The downside risks from premature tightening and cutting short the recovery too early is very, very high,” she said. “That should be the take-away for other central banks.”
After years of easy money policies, some central banks are inching toward raising interest rates or exiting emergency policy settings. The Federal Reserve has already raised rates four times since 2015 and plans to start shrinking its $4.5 trillion balance sheet. The ECB has signaled a slowing of its own massive bond buying program while others, such as the Bank of England, are among those tipped to tighten.
“Japan is symptomatic of other countries,” said Richard Yetsenga, who is the Sydney-based chief economist at Australia & New Zealand Banking Group Ltd. “Every country for which we get good data is reporting wages and core inflation well below where many standard relationships suggest they should be.”
There are other constraints in Japan including lagging productivity among workers. It’s also the case that Japan has seen hourly pay pick up for part-timers. The economy is on track for the longest expansion in 16 years and stocks are at the highest level in two decades.
That suggests that wages will start to increase in Japan, eventually, said Klaus Baader, chief Asia-Pacific economist at Societe Generale SA.
“I wouldn’t completely throw in the towel,” he said.
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