Japan’s labor market showed further signs of tightness in December, driven by a manpower shortage across a swath of sectors in a closely watched development as companies engage in annual wage negotiations with unions.

The unemployment rate fell to 2.4% in December from 2.5% in the previous month, the internal affairs ministry reported Tuesday. The number of people with jobs rose by 380,000 from a year earlier, a 17th consecutive increase. Industries that led the increase in employment included manufacturing, lodging and food services.

While a separate measure showed a slight weakening of labor demand, the labor market remains at its tightest levels in years. The job-to-applicants ratio edged lower to 1.27 from 1.28, missing economists’ expectations for the gauge to be unchanged, the labor ministry reported.

The Bank of Japan is watching the labor market closely as it seeks evidence of a virtuous cycle linking rising wages with demand-led price gains. In its quarterly outlook last week, the BOJ said "the rate of increase in scheduled cash earnings is likely to continue increasing firmly, in reflection of price rises and with labor market conditions continuing to be tight.”

The bank also expects other cash earnings to increase moderately, reflecting a recovery in economic activity. If authorities determine that the virtuous cycle is underway, they will undertake Japan’s first interest rate increase since 2007, ending the world’s last negative rate.

"With the prospect that the labor shortage will not be resolved in the near future, companies are strongly feeling the need to secure human resources,” said Shuji Tonouchi, senior economist at Mitsubishi UFJ Morgan Stanley. "I believe more companies will be willing to raise wages in the upcoming pay negotiations or hike salaries more than last year.”

Last year’s historic wage gains didn’t keep up with inflation, increasing pressure on household budgets.

Spring wage negotiations kicked off last week with ambitious demands from unions and optimistic pledges from some business leaders. Economists see a high likelihood of workers achieving pay gains comparable to or higher than those obtained last year. A survey conducted by the Japan Center for Economic Research found that large firms will boost salaries by an average of 3.85% this year.

BOJ Gov. Kazuo Ueda said at a news conference following last week’s stand-pat decision that he will carefully assess economic data including results of the pay talks as he and his board continue to inch toward a policy normalization that most economists expect by April.

"The BOJ wants to see tighter tighter supply-demand conditions that buoy labor compensation before it scraps negative rate. Early results of spring pay talks in March will indicate prospects for wage-driven inflation taking hold,” Bloomberg economist Taro Kimura said.

Japan’s chronic labor shortage is becoming increasingly serious and could pose a drag on the country’s economy in the long run.

The number of bankruptcies due to manpower constraints reached a record 260 last year, according to a report by Teikoku Databank. The data firm also noted that the construction and logistics sectors are facing the most serious challenges, accounting for half of those businesses that went under. An increasing number of smaller firms are relying on foreign workers to fill their needs.