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Japanese Economy Update

The Rise in Core CPI and the Outcome of Shunto

  Senior Research Fellow


Not only the headline but also core CPI is now rising by more than 2 percent

Headline consumer price index (CPI) has been rising since September 2021: its year-on-year rate of increase recorded 0.2 percent in September 2021 and continued to rise thereafter to reach 4.3 percent in January 2023. CPI excluding fresh food, which is the price indicator closely monitored by the Bank of Japan showed a similar trend: It increased by 0.1 percent in September 2021 and reached 4.2 percent in January 2023 (Figure 1).

The reason for the sustained increased of consumer prices was the increase in import prices: prices of imported agricultural products and imported energy rose as a result of the recovery in the commodity market, and the depreciation of the yen. If food and energy is excluded from the CPI and name it the core CPI (corresponding to the core CPI as defined in the United States), it had been falling until it started a belated increase in April 2022. At the December 2022, core CPI was still only 1.6 percent higher than what it was in same month previous year. The weakness of the core CPI reflected the weak recovery in aggregate demand. It explains the reason why the Bank of Japan has been reluctant in changing the quantitative and qualitative monetary easing with yield-curve control (QQE with YCC).

The most recent developments in the core CPI, however, is somewhat different from what it was until then. It has continued to rise to reach 2.6 percent in June 2023. The consumer prices that is considered to reflect the pressures on prices coming from domestic factors is now above 2 percent, which is the target of the monetary policy of the Bank of Japan.

Tighter market condition at the background

The background of this can be seen in the GDP gap figures that is estimated by the Cabinet Office. The GDP gap, which is the difference between potential GDP and actual real GDP, was negative by 9.0 percent of potential GDP in the second quarter of 2020, the quarter immediately after the outbreak of COVID-19 pandemic in Japan. It implies that the economy faced a significant excess supply situation which should exert a negative pressure on aggregate prices. The negative GDP gap, however, has been shrinking since then: it is now only 0.7 percent in the first quarter of 2023. It shows that there has been a recovery in aggregate demand. The environment for aggregate prices has improved (Figure 2).

Outcome of Shunto and its assessment

One of the consequences of the tighter supply-demand condition is the record high outcome of this year’s “Shunto,” (the spring wage round). According to the final announcement by Rengo (Japanese Trade Union Confederation), this year’s wage-increase was 3.58 percent. It is not only higher than the last year’s wage-increase of 2.07 percent, but is, in fact, the highest since 2013, the first year from which the data has become comparable.

This figure is often compared to the headline CPI inflation rate at peak, 4.3 percent in January 2023, so that implied real wage is considered to be negative. However, we should bear in mind that this wage-increase is of the basic pay (“scheduled cash earnings” in the term used in the monthly labour survey) so that we can expect the wage-increase to last until the next spring wage round. If that is the case, what should be compared to is the annual rate of increase of the CPI. If we take, for example, the CPI inflation rate for FY2023 that is expected by the 36 economists in the private sector (surveyed by the ESP Forecast by JCER in July 2023), the rate is 2.6 percent. If this is the case, then it implies that the real wage in FY2023 will increase by about one percent.

Having said that, here is a caveat. The real wage-increase mentioned above only applies to individuals. The wage-increase includes the rise in the wage resulting from a shift along the existing wage schedule due to the increase in the worker’s seniority. This does not necessarily mean that the wage will increase in macroeconomic terms. If we are interested in the wage-increase in macroeconomic terms, what we should look at is the “base-up” part of the wage-increase which corresponds to the upward shift of the wage schedule. The base-up in this year’s wage-increase is 2.12 percent, which is significantly higher than that in the past (Figure 3).

If we assume that this 2.1 percent is the rise in wages per employee of the economy, and the increase in employees to be around 0.4 percent (year-on-year rate of increase at May 2023), the increase in compensation of employees in FY2023 will be 2.5 percent. If we compare this with the nominal GDP growth rate, which is estimated by the private-sector economists to be 3.8 percent in FY2023, it implies that the labor share in GDP will fall in FY2023. While this year’s spring wage round was a significant achievement, it needed to be better from the point of view of the labor share in GDP.

Consecutive wage-increase to be anticipated

After the conclusion of the spring wage round, what needs to be seen is how much of the wage-increase is going to show up as an increase in household consumption. After all, what was pursued in the Shunto was the creation of a “virtuous cycle between distribution and growth.” Since the real purchasing power of income will soon be eroded by the rise in CPI, there is a possibility that much of the wage-increase is going to end up in savings. However, if this year’s wage-increase is seen as an increase in permanent income rather than a transitory income, more of its may be used to pay for additional consumption. That would be the case if, for example, there is an early commitment to the consecutive wage-increases in the future. What we would like to see is an early agreement of this kind at the earliest possible timing.