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The State of the Japanese Economy: From the Perspective of Employment and Income*1

  • *1This is an English translation of the Japanese Original on December 7, 2004.

April 27, 2005
Research and Statistics Department
Bank of Japan

Click on ron0504a.pdf (603KB) to download the full text.

Abstract

Against the background of economic recovery, the employment situation has recently been on a recovery trend as well. Developments in household income, however, have been weak in comparison to movements in nominal GDP and corporate profits, and there has been a dramatic fall in the labor share. Behind firms' persistent labor cost restraint are several factors: (1) adjustment pressures on the industrial structure so as to cope with developments such as globalization and the reduction in public works projects; (2) movements to strengthen firms' profitability; (3) structural changes in the labor market, as witnessed, for example, in the expansion in the number of non-regular employees.

Within this context, firms' labor cost restraint may be understood, fundamentally, as an aspect of corporate behavior aimed at raising the efficiency of their resource allocation, which is consistent with business fixed investment, the creation of new goods and services, and other positive business strategies. However, in addition to the three factors mentioned above, there is a fourth factor which has been restraining transmission of income from firms to households: because (4) after such a long period of low growth, the expected growth rate of firms in the mid-term is still not sufficiently high.

Meanwhile, the fact that wages are being held back compared to the rise in productivity-namely the fact that unit labor costs are falling-may also be held responsible for consumer prices' lack of responsiveness to the continuing economic recovery.

Although firms' labor cost restraint may be expected to persist for the time being, if the economic recovery continues, the extent of excess labor as perceived by firms will further ease and the expected growth rate of firms will rise. This is considered to result in a mild increase in household income. Nevertheless, there is large uncertainty regarding both the pace of increase, and the extent of the upward pressure that this will exert on consumer prices.

Given the rapid and inevitable ageing of its population and a declining birthrate, the priority for the Japanese economy is to maintain, and indeed raise, its economic vitality over the medium to long-term. In this regard, the functions that are demanded of the labor market in a broad sense, including for example the development of the skill-set of the younger generation, are expected to become more important.