Macroeconomy Insights

Shunto Wage Negotiation and Cost of Living

As Sanae Takaichi prepares to become Japan's first female Prime Minister, I took the opportunity to examine the macro fundamentals shaping Japan's consumer economy—household spending patterns, wage dynamics, and the confidence that underpins economic activity.

Key Observations:

Household Spending Pressures: Food accounts for 29.1% of household expenditure, with essential categories like transportation (17.6%) and utilities (7.4%) dominating budgets. Rice prices surging 94.4% exemplifies how supply-side pressures hit households where they spend most.

Regional Wage Dynamics:

Wage negotiations show growth across all regions (5.2-5.5%), but real purchasing power increases remain modest, ranging from just 1.4% to 2.3%. Shikoku leads in wage growth, while Hokkaido lags, highlighting substantial regional disparities.

The Confidence Paradox:

Perhaps most striking is the post-pandemic divergence between spending and sentiment. Household spending has reached 20-year highs, yet consumer confidence remains persistently low and continues to decline. This disconnect suggests Japanese households are spending out of necessity rather than optimism—a fundamentally different dynamic than pre-pandemic patterns.

What This Means Going Forward:

Takaichi has stated her intention to achieve demand-driven inflation backed by rising wages and corporate profits. Japan’s Takaichi recognises the need to achieve demand-driven inflation, but current data reveal a critical challenge: Japan is experiencing predominantly supply-driven pressures, while consumer confidence is weakening.

Inflation Decomposition - Demand and Supply Components

Japan's price level has grown at its fastest pace in over 30 years since 2021. Many are reasonably excited about the numbers and take them as a sign of a turning point for the economy.

However, how much of the inflation comes from "demand-pulls" and "cost-push" determines how cautious one needs to be in this optimism. Adopting Shapiro's (2024) new method for decomposing inflation, I plotted the sources of inflation (deflation) in Japan over the years.

The main idea is simple but elegant: if inflation is demand-driven, price and quantity should move in the same direction; if it is supply-driven, opposite direction. Researchers can decompose inflation by consumption categories, and then sum up the main inflation determinants weighted by spending.

1. Price changes in Japan are mostly driven by supply factors throughout the years. Meaning that monetary policy has little control over a great part of inflation.

2. Inflation in the post-pandemic era is not all cost-push. Significant shares of the inflation have been contributed by domestic demand.

3. Naturally, when sales tax increases, prices jump up. However, the YoY inflation quickly adjusted downward in the subsequent quarters.

My Thoughts:

1. Regardless of where inflation comes from, it's good to see a sustained level of positive inflation to escape the deflationary spiral. Hopefully, we will see more demand-pull inflation indicating a true revival of economic activity and will give BOJ more room for macro-economic adjustment.

2. Inflation is still sitting at a very high level compared to the last 30 years. However, there is little that the BOJ can do on the demand side. Another significant risk factor is the Trump administration's trade policies. If the US imposes additional taxes, even if Japan does not retaliate, there will be supply chain factors, exchange rate factors, tariff-pass-throughs, etc. that are likely to drive up the prices further to an unsustainable level.

3. Spring Wage Offensive (春闘) is drawing to a close. Early reports suggest that corporations are responding to wage demands, with average wage increases exceeding 5% – the largest growth seen in 33 years. This is expected to enhance consumer confidence, and I will be monitoring the developments closely.

Reference: Shapiro, A. H. (2024). Decomposing Supply and Demand Driven Inflation. Journal of Money, Credit and Banking.

Data: Japan e-stat "This service uses API functions from e-Stat, however its contents are not guaranteed by government."

Code: e-stat API call, inflation decomposition and plotting code are all available on my GitHub

GDP Component Analysis (Interactive Infographic, takes a few seconds to load)

• • 56% of Japan's GDP comes from private consumption, sitting in the middle among OECD countries

  • Japan's Imports and Exports are very small relative to its GDP compared to other OECD countries

The Hong Kong 2025-2026 Budget is expected to collect and spend 659 and 822 billion HKD, respectively. How will the revenue be collected and spent? I created several interactive infographics to visualise the flow of the government budget. 

Takeaways: 

1. The government bond issuance amount is about equal to the expenditure of the capital investment fund, i.e., the borrowing amount can be offset by future revenue generated by capital investment. 

2. At a 9% Government Debt to GDP ratio, the Hong Kong Government spends about 7.7% of its budget, or 67 billion, on principal and interest repayment.

3. Twice as much tax is collected from profit tax than salary tax. Transfers from funds account for another significant source of revenue.

4. The highest spending categories in Hong Kong are Infrastructure, Social Welfare, Education and Health.

5. Most subsidies go to Social Welfare,  Health, and Education (by far, not the $2 public transport scheme).

6. Most salaries and allowances go to Security and Social Welfare works.

• Interactive View of Budget Revenue and Expenditure 

• Interactive View of Budget Revenue and Expenditure in Nominal Amount

• Interactive View of Revenue Breakdown

*  Note: The number may not match the official figure due to rounding errors. Every reasonable effort has been made to ensure the accuracy of the numbers and categorisation presented; however, absolute accuracy cannot be guaranteed. 

• There is a sugar-rush phase lasting about two years. The increased labour productivity might be linked to nationalist policies supporting local firms, short-term fiscal expansion, and slow macroeconomic structure adjustments. 

• After the sugar-rush period, labour productivity tumbles, falling below earlier levels until the end of the populist rule. This decline may be attributed to an exodus of skilled foreign workers and weakened institutions. 

• Labour productivity growth is slow compared to other economies before a populist wins office, partly explaining the rise of right-wing populism. 

• Suppose the US imposes an additional 10% tariff on all imports. APAC exporters’ average duty burden will rise by roughly 1.4 percentage points, the country risk premium by 0.8 percentage points, and the impact on credit rating will be negligible. 

• 1 percentage point increase in the ratio of AI-related services to trade halves the impact of tariffs for developed economies and has no mitigating effect on emerging markets.