Article

Japan's manufacturing
employment hits 7-year high
Jobs revival comes as producers reverse offshoring
TOKYO -- Japanese manufacturing-sector employment
averaged more than 10 million workers from January to August,
exceeding that mark for the first time since 2010 as companies
bring more production home while exports recover on a mild
global economic recovery.

The manufacturing sector employed 10.03 million people on

average in the first eight months of 2017. The full-year average is
also widely expected to top 10 million for the first time in seven
years.

In August, when manufacturing employment totaled 10.02

million, the number of new manufacturing job openings climbed
11.7% on the year, compared with 6.3% in all sectors. Japan's
jobs-to-applicants ratio reached 1.52, the same as in July and
the highest since February 1974. Unemployment decreased 0.4
percentage point on the year to 2.8%, the Statistics Bureau said
Friday. At a time when Japan is already near full employment --
that is, when all those with the will and ability to work are doing
so -- expansion in manufacturing jobs serves as a primary force
behind further reduction in the unemployment rate.

Returning home

Robust exports of such goods as autos and computer chips, a

benefit of the global economic recovery, have led improvements
in overall production. At the same time, more Japanese
businesses are choosing to bring production back home rather
than raise it overseas. Capital investment by foreign units of
Japanese companies fell 10.2% on the year for the April-June
quarter, according to the Ministry of Economy, Trade and
Industry, continuing a slide that began in the April-June period
of 2014.

Persistent yen depreciation has made exports from Japan more

competitive in recent years. And labor costs in many Asian
nations are on the rise as their economies develop, lessening the
advantages to manufacturing in those countries. The per-unit
cost of labor when making goods in China is now 30% higher
than in Japan, according to SMBC Nikko Securities.

Such factors led JVC Kenwood to transfer production of certain

vehicle navigation systems for the Japanese market from plants
in China, Indonesia and elsewhere to a facilities in central
Japan's Nagano Prefecture in late 2015. Until then, nearly all of
its navigation systems were made abroad. Discount store
operator Daiso Industries used to obtain nearly all its household
goods and sundries from abroad but reports that those made in
Japan will increase.

Full speed ahead

The worsening labor crunch is also pushing companies to take

on more full-time workers rather than make do with part-
timers. Full-time employees in Japan rose 560,000 on the year
in August. The ranks of part-time and temporary workers grew
only 180,000. This trend could drive up household incomes as
part-timers secure higher-paying full-time positions and the
total number of these jobs increases.

Total wages paid to workers in Japan are growing 3% annually

in real terms, according to Tatsushi Shikano of Mitsubishi UFJ
Morgan Stanley Securities. As this measure goes up,
"households' sentiment is also improving, and consumption will
continue to climb," Shikano predicted.

A mixed blessing

Yet Japanese manufacturing's resurgence could hinder other

elements of an economic recovery, namely productivity growth.
"When labor is limited, the rational thing to do is import
tradeable commodities instead of producing them at home," said
Ryutaro Kono of BNP Paribas Securities (Japan). "But drastic
depreciation in the yen has brought about the reverse. Talent is
not flowing into nonmanufacturing growth fields, which
impedes the creation of new growth industries."

The manufacturing sector employed 16.7% of the Japanese

workforce in 2015, according to the government-linked Japan
Institute for Labor Policy and Training. The figure is the third-
highest among advanced nations, behind Germany's 19.3% and
Italy's 18.3%. The U.S., the U.K. and Canada have ratios of
around 10%.

Thailand and Malaysia have figures in the 16s, comparable to

Japan's. But in South Korea, only 12.2% of workers are in
manufacturing, giving other industries more room to snap up
talent.

Experts expect Japanese manufacturers to continue bringing

production home for now as labor costs elsewhere in Asia climb.
But significant appreciation in the yen, among other
developments, could halt or shift that trend yet again.
 Commentary

As macroeconomic conditions change, firms need to adjust their production plans and employment
practices, governments will alter their budgetary and labour policies, and even economists may
have to change their models.

Recently, Japan’s unemployment rate fell and real wages rose. To be unemployed, one must have no
job and be willing and able to work. Unemployment rate = x 100.
Real wage refers to the wage after adjusting for the change in price levels.

One reason for these changes is that “more Japanese businesses are bringing production back home
rather than raise it overseas” due to changes in overseas’ labour costs. This raises demand for labour
in Japan, shifting the demand curve right in the labour market.

The increase in demand increases quantity of labour, increasing employment, and puts upward
pressure on wages.

As a result of these changes, in Japan, = 1.52, which means for every 100 unemployed,
152 jobs are available. In other words, there is tight capacity in the labour market and perhaps the
current unemployment rate, 2.8%, is below the natural rate of unemployment (NRU).
NRU contains frictional, structural, and seasonal unemployment and is said to benefit the economy
as it allows workers to find better jobs. On the diagram, NRU is represented by the horizontal
distance between the intersection of S and D, and the labour force. Firms will need to increase
wages further to attract new workers or to keep workers to stay in their company.

More employment + higher wages will lead to higher disposable incomes for households, especially
if housewives start working due to higher wages. Higher incomes incentivize people to increase
consumption. The marginal propensity to consume (mpc) is the proportion of spending on
consumption to extra income. Employees have a higher mpc compared with business owners and so
as wages increase relative to profits, consumption may rise strongly and lead to a stronger multiplier
effect. Moreover, the rise in real wages, especially in the manufacturing and construction sectors,
may narrow income inequality

A tight labour market may also incentivize firms to take “more full time workers rather than make
do with part time”, so workers will not quit jobs easily. This is a good thing for Japanese workers as
often there is underemployment among the “employed” because workers who wish to work full time
are only given part-time jobs. Full time employment means more stable income and job security,
boosting confidence levels and increasing consumption further.

All of these factors increase consumption, shifting Aggregate Demand (AD) to the right in the
AD/AS diagram, as consumption is a factor of AD. In addition, “exports are recovering globally”.
Exports are another AD component, shifting AD further right.
The shift of AD in theory, should raise both Price Level (PL) and real GDP, as shown in the
diagram. However, currently in Japan, price levels are only barely rising. The reason may be
because the aggregate supply (AS) in Japan is a Keynesian AS curve or very flat (almost
horizontal). With a Keynesian/horizontal AS, an AD shift does not lead to a PL change.
This situation can also be explained theoretically using a Phillips Curve, which outlines the
relationship between inflation (the sustained rise in average price levels) and unemployment.
Usually economists suggest they have an inverse relationship, as demonstrated in the original curve
based on historical data.

However economists need to change their theories, since the rise in price levels in Japan is very
small and it can be said that inflation is nearly zero. Therefore, there does not appear to be a trade-
off between the unemployment rate and inflation. Japan’s “Phillips curve” seems to be virtually flat,
although recently when the unemployment rate was higher, there was negative inflation = deflation.
In conclusion, Japan is able to enjoy both a falling unemployment rate and low inflation, despite
what traditional economic theories suggest. Because of high consumption and exports, the
government could now change its budgetary policies from expansionary to contractionary, reducing
its deficit and maybe even changing it into a surplus.

However, the tight labour market may not be sustainable in the long-run, especially due to Japan’s
shrinking population. S Labour will fall but D Labour may rise. Japan can only maintain the size of its
labour force, (thus maintaining output) by allowing more immigration by overseas workers. The
government is having to change its policies on immigration, which it has previously opposed.
However, bringing in foreign workers may widen income inequality again, especially if Japanese
firms take advantage of workers from underdeveloped nations by paying them low wages.