Japan’s Labor Market Stays Tight, Supporting Wage Growth

(Bloomberg) -- Conditions in Japan’s labor market stayed tight in June, a development likely to keep sustained upward pressure on wages as companies compete to hire and retain workers.

The unemployment rate edged lower to 2.5% in June from 2.6% a month earlier, the ministry of internal affairs reported Tuesday. Economists had expected the reading to hold steady at 2.6%. The number of workers rose by 370,000, with women leading the gains, while those without jobs increased by 20,000.

An aging and shrinking workforce in Japan has created chronic labor shortages that helped encourage companies to agree to the strongest wage gains in more than three decades in annual spring negotiations with unions. Workers secured pay rises exceeding 5%, according to the final tally by the nation’s largest umbrella group for unions.

“The labor market remains tight,” said Takeshi Minami, economist at Norinchukin Research Institute. “That will certainly add upward pressure on wages and smaller companies don’t have a choice but to raise wages to secure manpower.”

Also, the labor ministry proposed last week a record 5% increase in the hourly minimum wage for this fiscal year, indicating that wage growth is rippling across a broad range of employment sectors.

The Bank of Japan is looking for evidence that sustained increases in wages will spur a recovery in consumption and kindle demand-led price growth, creating a scenario that would allow authorities to further normalize monetary policy. The central bank will detail its plans for quantitative tightening when the board concludes a two-day meeting on Wednesday. About 30% of surveyed economists say an interest hike is also likely at that time.

The BOJ is also expected to update its economic outlook. In the April report, the bank maintained that labor market conditions would likely tighten further in the course of the economic recovery, noting that “in this situation, wage growth is expected to increase as a trend, partly reflecting price rises.”

In a separate report, the job-to-applicant ratio edged lower month on month to 1.23, meaning there were 123 jobs available to every 100 applicants and marking the lowest reading since March of 2022, but the ratio of new job openings-to-seekers rose to 2.26. Taken together, the gauges indicate companies are still struggling to fill positions.

While the labor shortage may keep upward wage pressure, it increasingly places smaller companies in a difficult position. Some 182 companies went bankrupt due to manpower constraints in the first half of 2024, the most ever recorded, according to a survey by Teikoku Databank. Of these, 80% were firms with fewer than 10 employees, the report showed.

(Updates with economist’s comments.)