Japan’s current economic and demographic situation significant global implications, particularly regarding labor shortages, inflation, and interest rate trends. Japan has one of the oldest populations globally, with long life expectancies coupled with low birth rates. This has resulted in a shrinking and aging population, which is exerting upward pressure on wages and inflation.
Labor Market Dynamics
Japan’s labor force dynamics have shifted considerably. The working-age population peaked in the 1990s and has been declining ever since. This decline has caused a secular downtrend in the unemployment rate, although Japan has managed to maintain a higher labor force participation rate, primarily through increased participation by women and the elderly. Despite these trends, the increase in participation appears to have plateaued, meaning future labor shortages may intensify.
Wage growth in Japan has accelerated significantly due to these labor shortages. Historically, Japanese wages have been stagnant, but workers are now seeing wage increases of around 2% per year. Collective bargaining efforts in the spring of 2024 saw unions secure wage hikes of 5%, the highest in 33 years. This surge in wage growth has been widespread, affecting both the manufacturing and service sectors, and is contributing to inflationary pressures. Wage growth is further exacerbated by the recent wave of inflation, pushing companies to reconsider their strategies.
Corporate Response: Automation and Technological Investment
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