The latest Japanese inflation data showed that prices rose over the twelve months to June. In a piece of seemingly good news for Premier Shinzo Abe, the inflation rate, excluding fresh food, was the strongest for almost five years. However, in order for Abenomics ultimately to be a success, it is essential that wages keep up.
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The movement of inflation into positive territory in large part reflects the impact of changes in the yen, which has depreciated more-than 20% over the past year, raising the cost of imported fuels. Although CPI inflation excluding fresh food rose to 0.4% in June, the measure which also strips out energy costs still showed deflation of 0.3%.
The hope for Japanese policymakers is that inflation remains in positive territory and causes households and financial markets to raise their expectations accordingly. The Bank of Japan expects to see positive feedback from higher inflation, to higher inflation expectations and back again. Crucially however, policymakers also require that wage growth keeps up with rising inflation. If it does not, then the rise in inflation, resulting from a weaker yen, will be self-defeating as it will only serve to cut the real incomes of Japanese workers. As our chart illustrates, real pay growth has been negative for large parts of the past decade and has been so again of late. Data for May showed that total cash pay had fallen by 0.1% over the twelve months to May, while contractual (regular) pay, which gives a better indication of the underlying trend, fell by 0.4%.
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