Inflation, unemployment, and labor force. Phillips curves and long-term projections for Japan

TL;DR

This paper models Japan's inflation and unemployment using an extended Phillips curve framework incorporating labor force changes, providing updated long-term projections of deflation and rising unemployment through 2050.

Contribution

It extends the Phillips curve model by including labor force change as a key factor and offers updated long-term inflation and unemployment forecasts for Japan.

Findings

Inflation is projected to be negative over the next 40 years.

Unemployment rate is expected to rise from 4.3% to 5.5% by 2050.

The model accurately describes historical disinflation and deflation periods.

Abstract

The evolution of the rate of price inflation and unemployment in Japan has been modeled within the Phillips curve framework. As an extension to the Phillips curve, we represent both variables as linear functions of the change rate of labor force. All models were first estimated in 2005 for the period between 1980 and 2003. Here we update these original models with data through 2012. The revisited models accurately describe disinflation during the 1980s and 1990s as well as the whole deflationary period started in the late 1990s. The Phillips curve for Japan confirms the original concept that growing unemployment results in decreasing inflation. A linear and lagged generalized Phillips curve expressed as a link between inflation, unemployment, and labor force has been also re-estimated and validated by new data. Labor force projections allow a long-term inflation and unemployment forecast: the GDP deflator will be negative (between -0.5% and -2% per year) during the next 40 years. The rate of unemployment will increase from 4.3% in 2012 to 5.5% in 2050.