Abenomics is all the rage. Japan’s GDP grew at an annual rate of 3.5% in the first quarter, the stock market went up by almost 30% since December, and despite some uncertainties, sentiments, consumption, and exports are all picking up. However inflation is at -0.9% and survey-based inflation expectation has remained flat. Is inflation going to happen at all? This column argues the answer crucially hinges upon the implementation of structural reforms, especially in the labour market.
- Japan grew at 3.5% in the first quarter;
- The stock market is up; and
- Sentiments, consumption, and exports are all picking up – even if recent stock-market performance has created some uncertainties.
- March 2013 CPI inflation was -0.9% (year on year), down from -0.6% in February.
- Survey-based inflation expectations are flat.
Worse yet, only a third of the Japanese labour force (typically older and male labour) has a permanent contract. The majority of the young and female labour force is working under a temporary contract with much lower salary and practically no job security, which creates a kind of caste system in the labour market.
A permanent contract is especially hard to come-by for the younger generation and female workers. The youth unemployment rate in Japan is 8% (the total unemployment rate is 4.8%) as of 2011 according to the OECD, and the wage gap between male and female is the second worst among OECD economies.
Three pillarsAbenomics is comprised of three pillars:
- Aggressive monetary policy easing (Figure 2).
- Fiscal stimulus.
- Structural reforms.