Japanese wage growth: Off to the races?


Nov. 20 2020, Updated 3:08 p.m. ET

Japan’s wage growth

The below graph reflects the gloomy history of wage growth in Japan. While wage growth has made it into positive territory over the past year, the predominantly negative growth in real disposable personal income since 2005 indicates Japan’s weak economy. Japan’s real gross domestic product (real GDP) ranged from 0% to 2% growth from 2000 until the 2008 crisis, when it took a 9.4% plunge in March 2009. This weakness in wage growth stands in stark contrast to the comparative wage hyperinflation in China, as described in the prior series on China, China’s Wage Inflation: Bad News For Corporate Profits and Banks.

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The Japanese economy has improved a little since 2009, though real 2012 GDP was largely unchanged from 2005 GDP. Like personal income growth, as noted above, real GDP growth has also just barely moved into positive territory, up 0.9% in June 2013, year-over-year. The question arises, what can the policies of Japan’s new Prime Minister provide in order to convince consumers to spend more and grow the overall economy? As noted below, Prime Minister Abe has some fairly radical ideas.

“Abenomics” delivers unprecedented deficits

As we noted in the first series discussing “Abenomics,” Japan’s new Prime Minister, Shinzo Abe, in conjunction with Bank of Japan Governor Haruhiko Kuroda, will attempt to end the post-1990 deflationary spiral that has gripped the Japanese economy. These policies, known as “Abenomics,” will attempt to encourage private investment through a more aggressive mix of monetary and fiscal policy. “Abenomics” aims to end deflation by targeting a 2% rate of inflation, as well as to increase fiscal spending by 2% of gross domestic product. This level of government spending is expected raise the 2013 deficit to a whopping 11.5% of GDP in 2013. This is a greater budget deficit than the United States ran post–2008 crisis, reaching 10% of U.S. GDP during 2009–2010, though the U.S. federal deficit has more recently shrunk to nearly 4% of U.S. GDP.

Japanese government deficits surpass Greece

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In other words, Japan will run Greek-like budget deficits to get the economy moving. While Greece had a budget deficit of 15.6% of GDP in 2010, the Greek budget deficit is now approximately 10%. Japan had a small budget deficit of 2.5% of GDP before the 2008 crisis, though it reached 8.8% in 2010—not far from Greece’s 10%. Not to be outdone by Greece, Japan will grow the deficit from a current 9.2% of GDP to around 11.5% by the end of the year.

“Abenomics” delivers unprecedented monetization

The Bank of Japan reports that deposits stood at approximately 37 trillion yen when Abe was elected in November 2012, though they have recently doubled to approximately 74 trillion yen—approximately $370 billion to $740 billion USD. The entire monetary base of Japan was approximately $1.5 trillion USD in April this year—a 23% rise over April 2012, when Bank of Japan Governor Haruhiko Kuroda implemented his version of quantitative easing. Roughly half of Japan’s monetary base ($1.5 trillion) appears to be sitting in a Bank of Japan deposit account ($740 billion). As Kuroda’s quantitative easing plans progress, the monetary base is expected to grow to 200 trillion yen by the end of this year (approximately $2 trillion) to 270 trillion yen by the end of 2014 (approximately $2.7 trillion). Given that Japan has a GDP of roughly $6 trillion, this means that the monetary base of Japan will exceed 33% of GDP, with approximately half (or more) of that “cash” sitting with the Bank of Japan. This growth in the monetary base is expected to fuel inflation expectations in Japan and encourage consumption.

Japan’s quantitative easing (QE) surpasses the United States’ “QE Infinity”

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As Prime Minister Abe doesn’t wish to be outdone by Greece in terms of record budget deficits, so too does it seem that Bank of Japan Governor Koroda won’t be outdone by U.S. Federal Reserve (Fed) Chairman Ben Bernanke. While Bernanke’s Quantitative Easing Round III measures, referred to as “QE Infinity,” included $85 billion per month in bond-buying operations, Kuroda plans to purchase $7.5 trillion yen ($75 billion) per month in Japanese bonds. Though Japan’s dollar amount of bond buying is approximately 11% less than the U.S. bond buying amount, it’s important to note that Japan’s GDP is only 40% the size of the U.S. GDP. On a United States–versus–Japan GDP basis, the magnitude of Japan’s quantitative easing is more than double the size of the U.S. amount of quantitative easing. Kuroda’s bond buying operations represent roughly 15% of GDP, whereas Bernanke’s bond buying operations represent approximately 6.4% of GDP—2.35 times the magnitude of U.S. operations relative to GDP.

It’s important to note that the U.S. Fed has signaled that it may taper the size of its bond buying operations into the end of 2013, and perhaps end them by the end of 2014. In stark contrast to this upcoming “removal of the punchbowl” by the U.S. Fed, it would appear that Japan is just getting ready to get the monetary easing party started. As we move out of the 2008 global financial crisis, the U.S. and Japanese central banks appear to be parting ways and heading in different directions. Japan’s currency may continue to weaken as Japan increases monetary stimulus, while the U.S. currency could strengthen, given incremental monetary tightening—dragging dollar-pegged currencies (such as the Chinese yuan) with it. As if Chinese wages hadn’t been growing quickly enough already, this could add further pressure to wage inflation in China, as we discussed in China’s wage inflation: Bad news for corporate profits and banks.

Hang around, the party is just starting

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Given the sheer magnitude of “Abenomics”-led fiscal and monetary policy initiative, it would seem that the Japanese consumer has cause to be hopeful. While real personal income growth (above) has just barely moved into positive territory, it’s entirely possible that income growth levels will grow rapidly and reach the 2.5% annual growth rate seen in June 2006, before the global economy began to experience problems.


These developments have significant implications for the future trends in Japanese equity markets in relation to its regional export competitors, China and Korea. As 2013 progresses, investors could see a continued outperformance of Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan ETF (EWJ) versus China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). For further clarification as to why DXJ could outperform both EWJ and other Asian equity indices, please see Why Japanese ETFs outperform Chinese and Korean ETFs on “Abenomics.” Plus, as Japan pursues unprecedented monetary expansion and the U.S. Fed ponders monetary tightening, Japanese equities could also outperform broad U.S. equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), State Street Global Advisors Dow Jones Index SPDR (DIA), and Blackrock iShares S&P 500 Index (IVV).

For further analysis of how China is being affected by Japan and “Abenomics,” please see China’s exports: Is the Golden Age of Cheap Labor Coming to an End? For further analysis of how United States–related consumption trends could impact Japan’s “Abenomics”-led recovery, please see U.S. consumer spending: Sustaining the unsustainable? For further analysis of how exports in Japan are being affected by “Abenomics,” please see Japanese exports: Are we seeing an “Abenomics”-led recovery in Japan?”


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