Japan's unemployment rate fell to 2.5% in June, the lowest since January, as the economy continued to recover from the impact of the Covid-19 pandemic. The jobless rate was lower than the median forecast of 2.6% by economists. The number of workers rose by 190,000 from the previous month, while those without jobs fell by 40,000.
The data suggests that Japan's labor market is steadily tightening, which could put upward pressure on wages and help the Bank of Japan (BOJ) achieve its elusive 2% inflation target. The BOJ has been struggling to boost inflation for years, despite its massive monetary stimulus, as weak consumer spending and low wage growth have weighed on price pressures.
One of the main challenges for the BOJ is to change the entrenched deflationary mindset of consumers and businesses, who tend to expect prices and wages to remain low or fall further. This makes them reluctant to spend and invest, creating a vicious cycle of low growth and low inflation.
However, the recent improvement in the labor market could signal a positive change in this trend. The jobs-to-applicants ratio, a measure of labor demand, held steady at 1.30 in June, meaning there were 130 jobs offered for every 100 applicants. This indicates that employers are facing a shortage of workers, especially in the service sector, which has been hit hard by the pandemic.
According to a survey by the Japan Research Institute, the labor shortage index, which compares the number of job openings and job seekers, rose to 1.06 in June, the highest level since February 2020, before the pandemic. The index was above 1.0 for all industries except for accommodation and food services, which was at 0.98.
The labor shortage could force employers to raise wages to attract and retain workers, which could in turn boost consumer spending and inflation. Some signs of wage growth have already emerged, as the average monthly cash earnings rose 1.9% year-on-year in May, the fastest pace since June 2018. The growth was driven by a 3.1% increase in regular pay, which accounts for about 70% of total earnings.
The wage growth was also supported by the government's efforts to encourage companies to raise salaries, such as offering tax breaks and subsidies. Prime Minister Yoshihide Suga has urged businesses to increase wages by 3% per year, as part of his economic policy agenda. The government hopes that higher wages will stimulate domestic demand and help Japan achieve sustainable and inclusive growth.
However, there are still some uncertainties and risks that could hamper the wage growth and inflation outlook. The Covid-19 situation remains unpredictable, as new variants and outbreaks could lead to more restrictions and disruptions. The global supply chain issues and semiconductor shortages could also affect the production and exports of Japanese manufacturers. Moreover, the social and behavioral factors that influence the wage-setting and price-setting processes are complex and hard to change.
Therefore, the BOJ needs to maintain its accommodative monetary policy stance and support the government's fiscal and structural reforms, while closely monitoring the developments in the labor market and the inflation expectations. The BOJ also needs to communicate clearly and effectively with the public and the markets, to enhance its credibility and influence. By doing so, the BOJ can help Japan overcome the deflationary trap and achieve its long-term inflation goal.
Tech Alliance edit team