The latest Japanese unemployment rate for October released on Thursday indicates that the labour market remains tighter than ever at 3.1%. Below the 3.4% previously forecast, this is the lowest jobless rate Japan has seen since July of 1995 (shown on the graph below). The strength of Japanese manufacturing has been at the forefront of this. The preliminary Purchasing Managers’ Index (PMI) reading of 52.8 indicates an expansion of the sector at its fastest pace in over 18 months boosting employment. In theory, a buoyant labour market would lead firms to increase wages for workers but Japanese firms remain cautious in the midst of the slowing emerging markets and weak export growth.
Japan’s lacklustre wage growth has become very visible in the latest household spending figures. Falling by 2.4% compared to the previous year, weak household expenditure in an economy with 1.24 applicants for every job, is a clear sign that it is domestic consumption is a significant drag for growth and the reflation of the economy. On Wednesday Prime Minister Shinzo Abe called for a 3% increase to the minimum wage, which will hope to increase wage growth, stimulate consumer spending and create inflation. This wage-price spiral will certainly be necessary if Mr Abe hopes to meet his ambitious target of increasing the nominal size Japan’s economy by 3% a year despite its ageing population.
Inflation data released this week, as measured by the core CPI, shows a 0.1% reduction of the price level on the previous year. However, an alternative indicator of inflation released by the Bank of Japan, which strips out the effect of lower oil costs, shows a 1.2% increase in the price level. In addition to the optimism expressed by the Bank in recent months, this gives further indication that the BoJ is unlikely to change their monetary policy in the short-term, as their measure supports an improving underlying inflation trend since 2013. A recent poll by Reuters shows economists are split on whether more quantitative easing will follow at the start of next year.
On Friday, PM Abe announced called on his Cabinet to compile a budget for additional fiscal spending. The extra budget for April 2016 will aim to tackle the effects of both the declining population and the impact of trade diversion on sectors affected by the Trans-Pacific Partnership free trade agreement.
It seems that the Japanese government no longer considers deflation to be a top priority, and has shifted its focus toward wider revitalisation of the economy. The exact size of the extra budget has not been confirmed but Reuters sources suggest it will be worth over ¥3.1 trillion ($25.3bn).
“It’s important for people to realise that the government is focused on achieving the virtuous cycle of growth and helping people who have not benefited so far”
Akira Amara, Japanese Friday Finance Minister
Given the diminishing returns of quantitative easing, this will likely mean a permanent shift away from monetary policy toward fiscal policy and structural reforms is to follow. Staving off deflation will certainly remain a key concern for Japan but it seems, for now, that meaningful economic growth has taken priority.