Why just 2% inflation is enough to eat into real incomes in Japan

Like in other major economies, we expect inflation in Japan to remain elevated in 2022 – we project Japan’s inflation rate will hover around 2% y/y over the year. While relatively low by international standards, it’s the highest rate of inflation Japan has seen since 2008, excluding the short bursts triggered by hikes in the consumption tax.

What you will learn:

• Unlike other advanced economies, though, Japan’s labour market is unlikely to produce strong nominal income growth to counteract the 2% inflation. We think wage growth for both part-time and regular workers will be quite modest.
• Inflation is eroding real incomes globally, and Japan is no exception. We think real incomes in Japan will fall faster than in France, Australia, and other Asian economies, where nominal incomes look likely to grow faster than 2% y/y, while that of Japan will barely improve.
• Persistent slack in the labour market in terms of hours worked will weigh on the hourly wages for part-time workers. For regular workers, the traditional spring negotiations are likely to settle at a level that provides limited monthly wage increases throughout 2022.