Macro Economy in Japan

Japan's gross domestic product grew at an annualized 4%, beating the 2.5% expected for the second quarter. But he does not believe this economic growth is enough to support the yen because deflation is still a major concern, making rate hikes impossible. Japan's inability to generate inflation may be due to stagnant wage growth along with an aging workforce and labor shortages. Paradoxically, the shortage in the labor force is not resulting in significant wage growth, and this may be due to cultural factors.

Even though Japanese workers work significantly more hours than the OECD average, their labor productivity rate is below the average. Japanese labor is in short supply, yet demand for workers is not driving up wages. The Japanese public sector seems unwilling or unable to respond to what looks like clear free market incentives, and this is reducing the effectiveness of monetary policy in the Japanese economy.

The U.S. Dollar is currently in a downtrend because the market priced in an inflation outlook that was too optimistic against the data. However, in the proper perspective, American inflation is still strong compared to Japan. American inflation for July was around 1.7% compared to 0.4% for Japan. In conclusion, this situation will lead to the Japanese yen to fall.

I agree with the point about work inefficiency in Japan. Labour productivity in Japan is low compared with the OECD average. So, the Japanese government should reform this cultural weak point. Moreover, increasing of labor is also needed because labor is in short. Encouraging women labor to work is important because the labor rate of women who have children in Japan is low. The Japanese government should strengthen the child care support policy. Furthermore, the immigration policy to increase labor might be needed.

On the other hand, the author did not explain why although Japanese labor is in short supply, demand for workers is not driving up wages. In the economics theory, if the labor is in short supply, the wages should rise. I think this is because Japanese companies are hiring cheap labor, such as non-regular employees.

In addition, the author did not explain why weaker inflation in Japan will lead to falling of Japanese yen. According to purchasing power parity, the currency in countries in deflation will be strong. So, according to this, Japan is in weaker inflation than U.S., then yen will be strong. This is the contrary conclusion against the author’s conclusion.