By Takaki Tominaga,
Japan on Friday urged companies to raise wages on par with price hikes of around 2 percent, a level the central bank has set as its inflation target, so that the world's third-largest economy can complete its exit from deflation.
The government said in its Annual Report on the Japanese Economy and Public Finance that such an economy will block the country from falling into stagflation, at a time when the United States, Europe and others are suffering from price surges fanned by Russia's war against Ukraine.
It was the first such paper compiled under Prime Minister Fumio Kishida, who pledges to bring about "new capitalism," characterized by a virtuous cycle of growth and redistribution driven by investment into people.
The document underscored "the need to shift to a new system featuring sustained and stable price increases of about 2 percent and corresponding wage growth rates."
"Given that the economy continues to be picking up and the rate of price increases is not significantly high, Japan is not in a state of so-called stagflation," which involves slow growth and high inflation mixed with high unemployment, it said.
The rate of price hikes in Japan is higher than that in the recent past, but it is attributable primarily to surging import prices driven by crude oil prices, said a government official who briefed reporters.
Japan has yet to completely exit from long-lasting deflation, the official said.
"To get (the country) out of deflation, it is vital that nominal wages rise in line with price increases and growth in labor productivity," the paper said.
But since 1997, "The rate of increase in nominal wages has not been enough considering the rate of price increases," it said, citing businesses' cautiousness to expand operations by carrying out major investments in the midst of persistent deflation.
Companies have also regarded wages as costs, not investment in employees, resulting in insufficient distribution of profits.
Since the start of this year, the impact of the COVID-19 pandemic on the economy, such as private consumption, has diminished, while capital investment has shown signs of picking up but is still under pre-pandemic levels, according to the paper.
Following Russia's invasion of Ukraine that started in late February, the world has been hit with a storm of soaring prices that has stoked concerns about stagflation in many countries.
From macroeconomic perspectives, however, inflationary pressure is weaker in Japan than in Europe and the United States, the paper said.
It also touched on bottlenecks in advancing carbon neutral efforts in Japan, while saying environment measures can contribute to economic growth, citing stricter emission regulations resulting in increased competitiveness of Japan's auto industry in the 1970s as an example.
The paper said it is necessary for Japan to consider increasing the use of nuclear power because it emits no greenhouse gases, and fossil fuel and gas prices have been surging globally in the wake of the Ukraine crisis.
Most nuclear power plants in Japan have stayed offline since the 2011 Fukushima nuclear disaster.
The paper called for investment in digital technology skills, saying digital transformation involving artificial intelligence and Internet of Things would contribute to solutions to social issues and the promotion of carbon neutrality.
