Standard Life Investments

Weekly Economic Briefing

Japan & Developed Asia

Caught short


The unemployment rate is typically a useful guide to labour market conditions. In Japan, it has dropped to a 23-year low, having roughly halved since its 2009 peak. However, is the strength of this signal corroborated by other labour market data? Let us first look at evidence to assess labour demand. Last week’s Tankan survey pointed to acute labour shortages, with the employment conditions diffusion index printing at -28 (negative score is insufficient), a 3-point fall from the June survey. Furthermore, job openings are at a record high, with the number of opening across the country 1.52 times the number of applicants. Other important labour metrics are less buoyant. Total hours worked has continued to fall, suggesting the intensity of labour usage is declining (see Chart 8). In addition, labour costs data remain subdued. Basic wages continue to trend between 0-0.5% y/y, rising 0.4% y/y in August, while real wage growth is closer to zero. These conflicting signals present a problem for assessing the overall health of the labour market. The hours worked data appear to reflect structural changes in labour demand as employers, particularly SMEs, have been shifting to a five-day working week since the early 2000s. In addition, the increase in the part-time worker ratio has also been at play. However, to understand the wage cost trends one needs to delve deeper into the labour supply dynamics.

A sustainable improvement? No golden pension pot

One of the most striking changes in the Japanese labour supply in recent years has been the revival in the participation rate since 2012, compared to the previous decade and a half of falling participation. This reflects perhaps one of the most powerful achievements of Abenomics – the mobilisation of Japan’s elderly workforce (see Chart 9). Indeed, the participation rate of those over 65s has risen by nearly 5ppts since 2011. This reflects the appointment of a new Minister for Promoting Dynamic Engagement of All Citizens in Abe’s cabinet, who has been tasked with attracting senior citizens, as well as women, into the labour market. A key question is: can the pace of participation improvement be sustained? This depends on the scale of surplus labour. Based on senior participation rates, Japan compares reasonably well to the OECD average but has some way to go until it reaches the 31.5% participation of over 65s in Korea. Despite recent improvements, its female participation rate is still below the OECD average. Furthermore, the workstyle reforms scheduled to be legislated early next year are likely to further dismantle corporate compensation practices that favour full-timers while also improving work-life balance. Consequently, we think the adjustment of Japan’s labour markets in terms of improving non-regular workers appears to be just beginning.

Another potential source of labour supply comes from overseas. While the ratio of overseas workers to total workforce is still low at around 1.6%, it jumped 20% last year –  topping the symbolic one million mark. There are few signs of this slowing soon with policymakers calling for a doubling of the size of this workforce. Furthermore, strict visa criteria for service sector employees within strategic special zones is set to be relaxed, attracting tourism, retail and restaurant workers from overseas. Given this background, we suspect expanding labour supply will continue to dampen wage pressures.

Govinda Finn, Japan and Developed Asia Economist