Inflation and unemployment in Japan: from 1980 to 2050

TL;DR

This paper models Japan's inflation and unemployment from 1980 to 2050 using labor force changes, revealing a reliable Phillips curve and projecting continued deflation and rising unemployment over the next decades.

Contribution

It introduces a linear model linking inflation and unemployment to labor force change, providing future projections for Japan's economic variables.

Findings

A statistically reliable Phillips curve with R2=0.68

Inflation is projected to be negative over the next 40 years

Unemployment is expected to rise to 5.3% by 2050

Abstract

The evolution of inflation, p(t), and unemployment, UE(t), in Japan has been modeled. Both variables were represented as linear functions of the change rate of labor force, dLF/LF. These models provide an accurate description of disinflation in the 1990s and a deflationary period in the 2000s. In Japan, there exists a statistically reliable (R2=0.68) Phillips curve, which is characterized by a negative relation between inflation and unemployment and their synchronous evolution: UE(t) = -0.94p(t) + 0.045. Effectively, growing unemployment has resulted in decreasing inflation since 1982. A linear and lagged generalized relationship between inflation, unemployment and labor force has been also obtained for Japan: p(t) = 2.8*dLF(t)/LF(t) + 0.9*UE(t) - 0.0392. Labor force projections allow a prediction of inflation and unemployment in Japan: CPI inflation will be negative (between -0.5% and -1% per year) during the next 40 years. Unemployment will increase from ~4.0% in 2010 to 5.3% in 2050.