The unemployment rate fell to the lowest level in more than 25 years in May as companies ramped up hiring amid solidifying economic conditions, government data showed Friday.
That’s positive news for the Bank of Japan as it struggles to generate 2 percent inflation.
The rate fell to 2.2 percent, against an estimated 2.5 percent, the lowest since 1992, the Internal Affairs and Communications Ministry said. Separate data released the same day by the labor ministry showed the job-to-applicant ratio was 1.6, the highest since 1974. The ratio means there were 160 openings for every 100 job-seekers.
Companies in the country are grappling with a deepening labor shortage as the rapidly aging population means fewer workers. In a bid to tackle the situation, Prime Minister Shinzo Abe’s Cabinet earlier this month approved a plan to accept more workers from abroad.
The employment data released Friday point to stronger upward pressure on wages, which so far have not responded as expected to the supertight labor market. But as companies struggle to find workers they’re hiring more staff on permanent, full-time contracts, which generally means higher pay and benefits.
“Pressure to increase wages is, if not already strong, certain to get stronger,” wrote Bloomberg Economics’ Yuki Masujima. “Our view is that a pickup in wage growth will eventually feed into faster inflation. Actual CPI readings though, show it’s a long haul for the Bank of Japan, with the core gauge at 0.7 percent in May — far from the 2 percent target.”
The link between unemployment and wages is not as strong as it was in the past, and the falling jobless rate may have only a limited impact on pay, said Hisashi Yamada, senior economist at the Japan Research Institute.
“As for regular workers at big companies, wages are not going up much because management and labor unions are aware of the risk that something like the Lehman shock may happen again,” Yamada said. “Once companies raise wages, they won’t have room to deal with a shock like that. That’s why they are saving cash.”
Consumer prices in Tokyo, a leading indicator for the nation, are projected to rise more than expected after two months of slower increases. Prices in the capital, excluding fresh food, are projected to have risen 0.7 percent in June from a year earlier. An earlier forecast by Bloomberg projected a 0.6 percent rise.
“Tokyo CPI was better than I expected,” said Atsushi Takeda, an economist at Itochu Corp. “In the end, the stronger yen from the start of the year had been a factor that weighed down on prices, but that pressure appears to have come full circle.”
And Japan faces other economic challenges.
The export-dependent nation faces fallout from global trade tensions and the slowing of growth in China. Japan’s factory output fell slightly in May after rising for three consecutive months.
Industrial production fell 0.2 percent in May, better than the -1 percent forecast, from April, when it increased 0.5 percent. The month-on-month decline in factory output in May was mainly the result of lower auto production because of fewer business days during the month, the economy ministry said.
Year-on-year factory production increased 4.2 percent, higher than the estimated 3.4 percent rise, compared with a 2.6 percent rise in April.
Output is projected to rise 0.4 percent in June from May, and 0.8 percent in July.