Japan has entered a new phase in its fight against deflation, but stronger wage growth and improved productivity are needed if the economy is to turn the corner, the Cabinet Office said in a report released Thursday.
Describing wage growth as “modest” for most workers, the report on the state of the economy said companies appear more willing to raise pay for part-timers being used to fill the labor shortage than for full-time workers.
“There has been a change in phase toward beating deflation,” the government report said. “It’s important to make a reality more powerful wage growth while boosting productivity, so prices can rise sustainably.”
The report, released ahead of the annual shunto (spring wage negotiations) between management and labor unions, is also calling for “higher pay-scale hikes than ever.”
Persistently low inflation has posed a challenge to the Bank of Japan and Prime Minister Shinzo Abe during the nearly five years his three-arrow Abenomics program has been in place.
Abe is counting on companies to increase pay by 3 percent or more to bolster domestic demand-led growth as the government looks to continue the economy’s second-longest postwar expansion cycle.
Corporate earnings have been growing both in the manufacturing and service sectors while unemployment has fallen below 3 percent to a 24-year low. The government and economists believe that in such a tight labor market there is room for more robust wage growth.
The report said that the correlation between wage growth and higher profitability may have weakened in recent years, and that the same is true for labor shortages.
Private consumption, which makes up a large portion of gross domestic product, has been recovering moderately amid some downside risks, such as uncertainties about U.S. and European policies and possible fluctuations in financial markets.
The Cabinet Office has called for young people to boost consumption, citing a trend that has seen households with people under 40 cutting back on spending despite gains in disposable income. This demographic apparently prefers saving or has “little interest” in spending, the report said.