Wages in Japan...

Japan under Shinzo Abe is still trying to target inflation when unemployment has reached a very low level and the economy is waiting to see rise in wages and inflation in the core or manufactured goods segment when food and fuel inflation failed to respond due to low population growth rate and good supply-side. Japan is now targeting core-inflation with food since oil-prices have come down to half and are not a problem. But low unemployment-rate may signal a labour supply shortage which would increase demand for wages, and, could increase wage cost and inflation. Nonetheless, if Japan increases the borrowing cost it would be able to increase inflation in a proportion of increase in interest-rates. Too low interest rates for more than two decades have removed the constraint imposed by higher interest rates on the supply-side.  Food and fuel prices that generally result in inflation in a country are very low in Japan and supply is not a problem, therefore they do not show demand pressures and inflation. Japan has invested heavily in food and fuel supply.  But, low population growth rate might constrain labour-supply and may poke wages and inflation in the retail price of manufactured products because then the market would compete for labour. Japan’s open economy is too responsible for low inflation. Foreign supply of goods and services has also kept prices and inflation low. In short Japan’s supply side is too good that the economy failed to generate inflation, but very low unemployment would help increase wages which Abe wants to increase inflation. Abe is pleading to the Capitalists that they should increase wages to increase demand and inflation, but they are ignoring because that would increase cost and reduce profits when there is a downward pressure on the price-level and inflation due to low demand. It would reduce their pricing-power during slowdown. Japan is actually doing the same the other countries do in a slowdown... It is trying to cut real interest rate and wages by increasing inflation in order to increase investment spending, but due to inflation-targeting people are reluctant to spend because they are expecting inflation ahead and are saving more for the future which has actually put the economy in the liquidity-trap. Low spending (consumption and investment) has depressed prices and interest-rate pushing the economy in the liquidity-trap. To overcome liquidity-trap inflation targeting is a bad strategy because it would increase savings. Liquidity-trap is mainly an expectation problem; if people expect inflation they would save more for future, but if they expect deflation and higher real wages they would consume more because lower prices would increase demand. And in this situation if lower prices increase demand relative to supply then the economy might also be able to push inflation up in the future. So far the country has tried to increase investment spending and inflation, but low demand due to low real wages has failed to attract supply. Abe wants to increase inflation for the Capitalist and investment spending, but he may also try to increase consumption spending which might also increase demand and inflation. But, this time the economy must commit deflation and not inflation which could increase real-wages and demand. Japan might commit zero interest rate and more fiscal spending as long as deflation persists.  Abe can increase wages or real wages without the Capitalists’ help using the monetary and fiscal policies by committing deflation... He should commit that lose money-supply might also be deflationary when supply increases relative to demand against the long held opinion that more money-supply would only increase demand relative to supply and would stoke inflation. Lose money-supply might also increase supply and lower the price-level. More money-supply may also increase supply by lowering interest rate cost which may also decrease the price-level, and, increase real-wages, demand and growth...