Research Briefing | Apr 28, 2023

Japan: The impact of structural labour shortages on inflation

Japan: The impact of structural labour shortages on inflation

We have revised up our long-term wage and inflation projections based on a larger impact from structural labour shortages due to adverse demographic trends. Even after raising our wage growth assumptions by 0.5ppts on average over 2024-2030, however, we still forecast inflation only reaching 1.4% in 2030 – well short of the 2% target.

What you will learn:

  • We now project higher base-wage increases for regular workers. We assume that wage growth set in the annual spring negotiations will rise gradually to 3% by 2030 from an average of 2.3% in the five years before the pandemic. Despite the rising need for wage increases to secure talented workers, Japan’s rigid employment system will constrain pay growth.
  • We also revised up our projection for the hourly wage for part-time workers, which is more elastic to labour market conditions than wages for regular workers. We project hourly wages to increase as fast as in the late 2010s this year and then to accelerate, reaching close to 4% by 2030 due to the limited pool of additional labour supply.
  • Gradual but persistent wage rises will boost inflation expectations accordingly. Given that Japan’s inflation expectations tend to be formed adaptively, we believe that inflation expectations will rise in accordance with actual price developments. In our baseline, we assume that inflation expectations will rise only gradually to 1.5% in 2030 from 1.1% in 2022.
Back to Resource Hub

Related posts

China city urban

Post

Is China headed for a Japanese-style balance sheet recession?

China's weak economic activity amid a housing correction has led many investors to draw comparisons with Japan's balance sheet recession of the 1990s. Despite the different pathways, there are several similarities between China now and Japan then that may augur a similar future of a period of prolonged stagnation.

Find Out More
Japan food inflation

Post

Food-driven inflation is unlikely to stay in Japan

As food tends to be purchased often and account for a large part in the consumption basket – 22% in CPI, excluding restaurants – price increases in food give considerable impact on households' purchasing power.

Find Out More
tokyo

Post

The BoJ will conduct YCC policy with greater flexibility

Despite today's (28th July) surprise tweak to YCC policy, we continue to believe that Governor Ueda is determined to avoid premature tightening and will spend another year or so to carefully assess whether the economy is on track to achieve 2% inflation within his five-year term.

Find Out More