Unemployment and the Japanese Labour Force

I'm afraid there are going to be rather a lot of charts on this post, since it is a complex story, and it is important to try and understand what is happening to unemployment in Japan, since if you don't you won't get to see why this recovery isn't a "normal" one. First off the statistics bureau have published the July monthly results from the Labour Force Survey. The headline story is, of course, that unemployment has dropped for yet one more month, and of course this is the principal story that the financial press serve us up.

But Friday’s economic figures also contained material for hawks at the BoJ, should they wish to use it. ...... the unemployment rate inched down 0.1 percentage points to a nine-year low of 3.6 per cent, suggesting tight labour demand will eventually create price pressure through higher wages.
Financial Times

Employment prospects improved. The jobless rate fell to 3.6 percent in July, the lowest since February 1998, from 3.7 percent. A ratio that shows how many positions are on offer for each job seeker held at 1.07, near a 14-year low of 1.09. "Steady improvement in the job market is a positive thing, but the question is when that's going to feed through to wages,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. in Tokyo. "The consumption data in July was affected by one-time factors, but spending is decelerating.''
Bloomberg

So now lets take a look at the charts. First off the unemployment rate has been, as we can see easily enough, dropping steadily:



But this doesn't tell us the whole story, not by a long way it doesn't, since Japan has a rapidly ageing population, and hence the numbers of people in all the younger age groups is steadily declining. So let's look at the numbers of people actually in employment.



Well, as we can see here, the numbers of those employed have fluctuated, the number was dropping from last October, but did start to pick up again in March, and has now started to fall back again since May. The only point I wish to establish here is that, in the context of an ageing population, a drop in the unemployment rate is perfectly compatible with a falling number of persons employed, and as such the unemployment rate doesn't tell you that much about the earning capacity of the entire population.

But the situation is even more complex. If we look at a breakdown of what are classified as "regular employees" we will see that while the total number of such employees has been pretty stationary for some years now, in fact the number of full time employees has been dropping steadily since the late 1990s (Japan's structural reforms). What this reflects in part is that older workers retire from their full time employment and subsequently take up part time employment. This latter is less remunerative, and this, in part, explains the downward tendency in wages and salaries.




But the situation is even more complicated, since what we have above are the data for regular employees. But there are, of course, "not-regular" employees, and not a few of them actually, as can be seen in the following chart.



Well, there is more detail to go into on all this, especially in terms of participation rates and how this all affects earnings. But I think by now I should have made my point. The headline unemployment number doesn't tell you very much at all in Japan, and anyone who tries to use it to tell you that earnings push inflation is coming is selling you a pup, that is what they are doing.

Japan July 2007 Industrial Output

Numbers released today by the Ministry of Trade, Economy and Industry showed a fall in industrial production in July, a development which will provide further encouragement for BoJ bearishness on interest rates. Industrial output fell a seasonally adjusted 0.4 per cent from June.





In this case it doesn't so much seem to be the weather which is being given the reponsibility, but rather the earthquake:

``Industrial production was affected by the earthquake, but if you look at the outlook, we needn't be too concerned,'' Economic and Fiscal Policy Minister Hiroko Ota said at a regular press conference in Tokyo.

However, if we look at the chart for the rate of annual increase by month, we will see that this has now been slowing since February, and maybe my memory is short but I don't recall earthquakes in March, April, May or June.

Japan July 2007 Income and Expenditure Survey

Spending by households dropped in Japan in July for the first time in seven months, according to data released today by the Statistics Bureau. Here's the chart:



As usual, we are being told that the weather is the problem:

Spending by households unexpectedly dropped for the first time in seven months, as a typhoon kept shoppers at home and a tax increase weighed on sentiment.
Bloomberg

In fact, just a quick look at the chart should tell you that we may now be resuming a trend which was all too evident across a big part of 2006, typhoon or no typhoon. We haven't seen any upward movement in consumption worth speaking about since May. now

Japan Consumer Prices July 2007

Japan remained mired in deflation for the sixth straight month in July, according to figures published by the statistics Office today that showed a 0.1 per cent fall in core consumer prices (excluding fresh food) over July 2006. The news obviously will make it even harder for a Bank of Japan which was already struggling to find arguments to justify a raise in interest rates at its September monetary policy meeting. Indeed the odds on a rate rise this year (or even this business cycle) now seem to be reducing rapidly.

Here is the chart of the index itself:



And here are the year on year percentage changes for the three principal indexes. As can be seen we are back in deflation across the board since January.



Comment

Only a few months ago, an autumn rate rise had become the consensus view among Japan economists. But since then, turmoil in global credit markets and a fall in Japanese share prices have generated a wait-and-see attitude among BoJ board members, making them reluctant to raise the benchmark rate above its current 0.5 per cent level. Thursday’s weak retail sales figures, and Friday’s evidence of continuing deflation, make a rate rise in September even less likely.
Financial Times

The reports bolstered speculation the Bank of Japan will delay raising interest rates until it can gauge the effects of the U.S. housing recession on growth in the nation's biggest export market. Expectations of a rate increase have fallen since losses on U.S. subprime mortgages caused corporate credit costs to jump, global stocks to plummet and the yen to surge.
Bloomberg