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Potential Growth in Japan: Issues on Its Relationship with Prices and Wages

日本語

December 13, 2024
Ichiro Fukunaga*1
Yoshihiko Hogen*2
Yojiro Ito*3
Kenji Kanai*4
Satoshi Tsuchida*5

Abstract

This paper looks back on the background of the sluggish potential growth and the slowdown in labor productivity growth since the 1990s in Japan, and raises some issues on their concepts and measurement, as well as on their relationship with prices and wages. Specifically, we point out that (1) there is a great deal of uncertainty in estimating the potential growth rate due to differences in approaches; (2) a decline in the potential growth rate could be accompanied by an even sharper decline in aggregate demand, leading to a worsening of the output gap; (3) the slowdown in labor productivity growth, combined with the decline in the labor share and the deterioration in the terms of trade, has exerted downward pressure on real wages; (4) the slowdown in labor productivity growth has also led to upward pressure on prices through rising unit labor costs; and (5) the prolonged deflation and low inflation themselves might have adversely affected productivity through suppressing demand for capital investment and other factors. While the sluggishness of potential growth and the slowdown in labor productivity growth are serious problems in themselves, monitoring these trends is also necessary for conducting monetary policy with the aim of maintaining price stability. It is also important to look at the relationship between productivity, prices, and wages from a variety of perspectives, while being mindful of the uncertainties in these estimates.

JEL classification
E20, E30, J30, O47

Keywords
potential growth rate, labor productivity, prices, wages, Japan's economy

The authors would like to thank Kosuke Aoki, Toyoichiro Shirota, and Bank of Japan staff for their helpful comments and discussions. We also thank Ko Adachi, Naoya Kato, Ayana Shibasaki, Yusuke Takahashi, and Ryotaro Todoroki for assistance. Any remaining errors are attributable to the authors. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank.

  1. *1Research and Statistics Department, Bank of Japan
    E-mail : ichirou.fukunaga@boj.or.jp
  2. *2Research and Statistics Department, Bank of Japan
    E-mail : yoshihiko.hougen@boj.or.jp
  3. *3Research and Statistics Department (currently Institute for Monetary and Economic Studies), Bank of Japan
    E-mail : youjirou.itou@boj.or.jp
  4. *4Research and Statistics Department, Bank of Japan
    E-mail : kenji.kanai@boj.or.jp
  5. *5Research and Statistics Department (currently Monetary Affairs Department), Bank of Japan
    E-mail : satoshi.tsuchida@boj.or.jp

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