Japan’s economy has dragged itself out of recession, but the country’s limp job market is hobbling the recovery. While money-printing can further weaken the yen and boost exports, stronger domestic demand depends on creating more full-time, well-paid jobs.
Gross domestic product expanded at a 2.2 percent annualised rate in the final three months of 2014, reversing two straight quarters of declining output. However, the revival was weaker than expected. Economists surveyed by Reuters had forecast growth of 3.7 percent.
A third of the expansion came from increasing net exports. By contrast, domestic demand – which plunged after the government hiked the sales tax last April – remains weak. Despite a 60 percent increase in the Bank of Japan’s quantitative easing programme in October, private non-residential investment barely grew. Spending on new homes declined, and consumption growth was flat.
Much of the blame lies with Japan’s fractured labour market. Since Shinzo Abe was elected prime minister in December 2012, the ranks of temporary and part-time employees and short-term contract workers – have swelled by more than 10 percent. Better-paid, full-time jobs have shrunk by 1 percent.
Reforming Japan’s crusty labour laws should give those non-regular employees greater job security, encouraging them to demand higher wages – and spend the proceeds. However, companies will continue to resist change, viewing any interference in hiring practices as a raid on their profitability. As a short-term demand palliative, Abe may need to boost government spending instead.
Japanese stocks rose after the GDP report, as investors bet that the weaker-than-expected recovery will eventually force the BOJ to reach for an even bigger stimulus package. But more yen-printing on its own is highly unlikely to translate into faster wage growth.
Japanese worker productivity has slowed over the last two decades. Overdependence on poorly trained non-regular workers could bring efficiency gains to a standstill, in turn making employers even more reluctant to raise wages. The GDP report is a reminder that a limp recovery is becoming immune to monetary medicine. Unless Japan’s labour market is fixed, the remedy might lose all its potency.