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Japan: Unemployment appears to have peaked

Fri, Oct 30 2009, 16:07 GMT
by Flemming J. Nielsen

Danske Bank A/S

• The unemployment rate surprisingly dropped for a second month in a row in September and there are now clear signs that the labour market has stabilised and the unemployment rate has peaked. In addition, there are signs in today’s consumer prices that deflationary pressure has started to ease. 
  
  
• This calls into question the Bank of Japan’s (BoJ’s) forecast that deflationary pressure will prevail well into 2011. Our call remains that the Bank of Japan will lag the ECB and the Fed in the monetary tightening cycle, but not by as much as the market currently expects.

Unemployment appears to have peaked

The unemployment rate in September surprisingly dropped for the second month in a row to 5.3%. This time it is much more difficult to explain the drop as a statistical blip as all major
labour market indicators improved in September. The job-to-applicant-ratio improved for the
first time since April 2007 (see chart) and total employment increased for the second month in
a row. In addition, it appears that wages (excluding bonuses) have stabilised in recent months.

Hence, it appears that the labour market has stabilised much faster than expected. We believe
it is fair to say the consensus view is that unemployment should increase in 2010 and the
unemployment rate peak above 6%.

However, is the stabilisation really that surprising? The second chart to the right shows our
forecast for quarterly changes employment based on current and lagged GDP growth. If we are
right in our assumptions, that GDP growth in H2 09 is running around 4% q/q, employment
should actually start to stabilise and turn positive in Q4. Hence, the apparent stabilisation in
the labour markets gives some support to our view that GDP growth in Japan is currently
running substantially above potential.

Deflationary pressure has eased slightly

The current stabilisation of the labour market, to some degree, puts into question the BoJ’s
forecast that deflationary pressure will prevail well into 2011. This view was communicated by
the BoJ today in connection with the release of its new macroeconomic forecast, see Flash
Comment - Japan: BoJ unwinds non-conventional easing.

A closer looks at today’s September inflation data, actually suggests deflationary pressure has
already started to ease as both headline and core inflation have eased in the recent month (see
chart to the left). With the recent jump in crude oil prices, headline inflation should continue to
edge higher in the coming months. While we expect headline inflation to remain in negative
territory well into 2010, we doubt it will continue to do so in 2011.

So our main message is that the BoJ will lag the ECB and the Fed in its monetary tightening,
but not by as much as the market currently expects.

• Download full report with charts

Published on  Fri, Oct 30 2009, 16:09 GMT