The latest consumer price data released earlier this month show that Japan is again at risk of falling into deflation. The Bank of Japan has revised down its inflation forecasts accordingly and now expects growth to be lower than previously forecast for 2015 and 2016. For many observers, one of the main reasons for the continued low inflation and economic stagnation is the slow increase in wages. Since the launch of "Abenomics," wages in Japan have been barely rising and have even fallen in some sectors. Stagnant wages dampen domestic demand, undermining efforts to jump-start the Japanese economy.

A closer look at the recent trends in the Japanese labor market reveals why wages are not increasing. Over the past decade, regular employment has been increasingly replaced by temporary jobs at low wage rates. More and more young Japanese are drawn into low-wage jobs with low productivity. The centerpiece of economic reform should therefore be the labor market. Japan has a well-educated labor force that should be employed more efficiently to give young Japanese more prospects for growth.

At first glance, the Japanese labor market looks in rather good shape. Economic stagnation typically goes hand-in-hand with a fall in labor force participation. However, in Japan, the dynamic is different—labor force participation has increased from 62.9 million in March 2013 to 63.7 million in March 2015. Given that Japan's population is shrinking, this expansion of the labor force by 1.2 percent might appear to be an impressive achievement by the current government. However, a closer look depicts a less rosy picture. The growth in employment has happened thanks to a rapid expansion of non-regular and part-time jobs by over 5 percent. In contrast, the number of regular permanent jobs has fallen slightly, by 1.6 percent.