Japan’s Economy: Monthly Outlook (July 2018)

◆As was analyzed in detail in our previous report, “Japan’s Economy: Monthly Outlook (June 2018)”, estimated impact on the real economy of additional tariff measures scheduled to be implemented or now being considered by the US and China is expected to be limited, with China at -0.14%, US -0.15%, and Japan at -0.01%.On the other hand, the IMF, as well as other international organizations, has also issued an estimate, which sees a -2% decline in the global economy if the cost of global trade rises by 10%. The deviation between the two estimates is due to the difference in assumptions. The growth rate in the cost of global trade associated with US-China tariff measures is more likely to be no more than 0.26%. Hence, using the IMF estimate, the impact on global GDP would be -0.05%. Even when we include additional tariffs on steel and aluminum, as well as retaliatory tariffs, the impact on global GDP would still be only -0.07%.

◆In conclusion, the main risk to Japan’s economy is not the US-China trade war. For Japan, what comes later is a life or death question – whether or not additional tariffs will be levied on automobiles. Additional tariffs of 20% would cause global GDP to decline by -0.1%, but the cost to Japanese corporations due to tariffs on automobiles and automobile parts would grow by more than 1.7 tril yen. Hence the upcoming trade negotiations on automobiles will be Japan’s moment of truth.

◆With structural factors unique to Japan, the labor market is moving into a new phase. While the decline in working-age population as such began sometime during the middle of the 1990s, the shortage of manpower only became evident around 2010 as a result of progress in the hollowing out effect. But now corporations have begun to seek out a cheap underutilized labor force as a result of the relative decline in unit labor cost. Until now, the majority of this market was accounted for by women part-time workers. Over the past few years, the labor participation rate of women has improved considerably, centering on the age-range of 30 to 50, and it is difficult to hold down a head count any larger than this. As a result, corporations are now taking new approaches to acquiring more workers. These are (1) changing the status of non-regular employees to that of regular employee as a means of extending average work hours, and (2) using the underutilized work force, which includes younger workers, the elderly, and foreigners.

◆While the shortage of manpower deepens, the average wage does not rise, which leads some to question the validity of the Phillips curve. However, if we look at wage growth according to the Phillips curve and perform a breakdown by age-group, we find that in current-day Japan, the Phillips curve is still valid. The essential problem is that the labor market is tight only in the younger age range, while the figure for the middle-aged slacks off considerably. In other words, a “generational mismatch” has occurred between the profile of human resources being sought (demand for labor) and the labor supply. The current condition of Japan’s labor market is represented by the fact that wage inflation and deflation is partially mixed.