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Economics: Japan
Economics – Markets – Strategy
Business outlays
will fall 1.4% this
year
business spending will actually contract, in both sequential and year-on-year
terms. For the full year, private non-residential investment should fall 1.4%,
compared to a 1.9% gain in 2007. Even after factoring in a sharp (technical)
recovery in residential investment, total private investment will still be down
1.1% on the year.
No chance of wage growth
With profit earnings and margins under pressure, it is hard to see wage growth
emerging from its long-term stagnation any time soon. Since Dec07 cash earnings
have rebounded slightly (to a negligible 1% YoY as of Apr08), but as evident
from Chart 5, earnings for the past few years have spent much more time declining
than rising. Indeed, since the Asian crisis of 1997, earnings have in fact contracted
0.7% YoY on average, in part reflecting the shift by employers towards (cheaper)
part-time workers.
The job market is
weakening
The stagnation in wage growth occurred in spite of a significant recovery in the
labour market, particularly between 2003 and 2007; the rate of unemployment
fell nearly to pre-crisis levels, and there were significantly more jobs per applicant
than before the crisis. Since end-2007, however, labour market conditions have
weakened – there is now less than one job per applicant (0.93 jobs as of Apr08,
to be precise), and the unemployment rate stands at 4.0%, compared to a low
of 3.6% in mid-2007. Now that labour market conditions are past their peak,
there is virtually no chance of positive wage growth in the foreseeable future
(Chart 6).
Chart 5: Wage growth to remain stagnant
% YoY, 3mma
8
6
4
2
0
-2
-4
-6
Nominal cash
earnings
Inflation adjusted
Latest: Apr08
Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06
Chart 6: Unemployment is rising again
% Ratio
6.0
0.0
Unemp rate sa
5.5
0.2
5.0
4.5
0.4
4.0
0.6
3.5
0.8
3.0
Job-applic ratio,
1.0
2.5
sa (RHS, inv)
2.0
1.2
1.5
1.4
1.0
Latest: Apr08
1.6
Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06
Consumer spending will slow
The lack of wage growth going forward is a negative for the consumer spending
outlook, and in the remaining three quarters of the year we expect real private
consumption expenditure (PCE) to drop back to around 0.1% QoQ, from an
unusually strong 0.8% QoQ rise in 1Q08. For the full year, PCE will slow to 1.4%
from 1.5% in 2007.
Inflation is hurting
consumers
Going forward, households will have to continue grappling not only with wage
stagnation, but also, as is the case with the corporate sector, rising prices. Where
rising prices eat into firms’ margins, within the household sector they eat into
wage growth and purchasing power. Referring again to Chart 5, we can see that
after adjusting for inflation, wages in Apr08 were up only 0.2% YoY, versus a
nominal 0.8%.
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