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Wage growth is needed to defeat Japan’s ‘deflation monster’, says investment expert

Key Points
  • Japan's second quarter gross domestic product (GDP) grew 4 percent, beating expectations of 2.5 percent growth.
  • Deflation is still a concern, even though the economy is growing, warns Tapan Datta, head of asset allocation at Aon Hewitt.
  • Labor shortages will be a big headache for Japan's economy, says Seijiro Takeshita, professor of management and information at the University of Shizuoka.
University students line up as they attend Rikunabi Live, a job fair in Chiba, Japan, on Wednesday, March 1, 2017.
Ko Sasaki | Bloomberg | Getty Images

Japan's economy grew better than expected in the second quarter, but a lack of wage growth in the economy and labor shortages are likely to cause problems, markets watchers tell CNBC.

"Despite this very tight labor market there's very little wage growth in Japan. I suppose you could argue there are echoes of that in other economies, but we need to see that wage growth to see that deflation monster defeated," Tapan Datta, head of asset allocation at Aon Hewitt, told CNBC's Squawk Box on Monday.

Datta says that while Japan's economy is growing, he warns the "deflation monster" has not been conquered and the economy is struck in a grey area between inflation and deflation.

This comes as Japan's second quarter gross domestic product (GDP) outpaced expectations. Analysts forecast growth of 2.5 percent, but the economy managed to expand by 4 percent in the April to June period.

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Without wage growth to push up inflation, the Bank of Japan will be unable to raise interest rates any time soon, warns Cameron Umetsu, chief Japan fixed income strategist for Mizuho International.

"The policy authorities still have a lot of work to do given the reluctance of corporate Japan to offer significant wage increases amid elevated global uncertainty," he said in a research note published Monday.

"In the final analysis, the BoJ story remains the same - there are no fresh reasons to ease or tighten, so expect steady policy ahead."

Datta did say that Japanese equities offer good value. While the closed Monday's session down almost 1 percent to its lowest level since May due to concerns about North Korea, the index of Japanese companies is up 15 percent over the past 12 months.

Seijiro Takeshita, professor of management and information at the University of Shizuoka, also shared his concerns about Japan's economy with CNBC, saying that the tight labor market (which means there are more jobs available than workers to fill them) is going to cause a lot of problems.

He says tightness in the labor market is resulting in corporations expending capital on labor shortage related issues.

"In the short to mid-term that sounds very, very good, but if you look at a longer run, especially considering the structure of Japanese corporations, which is very much skewed towards growth orientation, lack of labor is going to be a very, very big headache," he warned CNBC's Squawk Box.

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Takeshita also talked about external factors causing problems to the economy, such as stagnant oil prices are holding back inflation.

"We shouldn't forget about geopolitical risk we're facing right now in Japan, especially with North Korea. Also, Japanese authorities are getting quite worried about what's going on in the United States as well," he said.

"External factors are another negativity we must see in the mid-term."

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