Japan’s unemployment rate has fallen for the first time in three months, potentially feeding into higher wages and providing support for the Bank of Japan’s sustainable inflation goal down the line.

The jobless rate dropped to 2.6% in April, down from 2.8% in March, the internal affairs ministry reported Tuesday. Economists had expected the unemployment rate to decline to 2.7%. The number of those without jobs declined by 150,000 from the previous month.

Separate data showed the jobs-to-applicants ratio remained unchanged from the previous month at 1.32, meaning there were 132 jobs available for every 100 applicants and indicating continued relative tightness in the labor market.

Tuesday’s employment figures reflect some positive developments in the Japanese economy, which appears to be showing further signs of recovery from impacts of the pandemic. The tightening jobs market could support recent wage growth and help sustainable inflation down the line, a scenario that both the government and the BOJ has been seeking.

"Various economic indicators show that the state of labor shortage is returning to pre-pandemic levels or worse, and there is strong pressure to raise wages,” said Koya Miyamae, senior economist at SMBC Nikko Securities.

In its most recent quarterly report, the central bank said that the results of wage talks to date suggest sizable gains in both small and large businesses as well as for part-time workers, citing figures from labor union confederation Rengo.

Meanwhile BOJ Gov. Kazuo Ueda has recently signaled his desire to maintain policy flexibility, and not rush to the conclusion that sustainable inflation has been achieved.

"Looking ahead, we expect demand for labor to increase in May, with automobile manufacturers stepping up hiring as chip shortages abate and companies in the service sectors position for a comeback by foreign tourists. But we also expect labor supply to continue to increase — tempering any tightening in the job market,” said Bloomberg economist Taro Kimura.

As virus-related restrictions have been further relaxed since March, Japanese firms across various industries have been grappling with an escalating shortage of labor. The BOJ’s latest tankan business sentiment report showed that firms are facing the worst manpower constraints in about four years.

The labor shortage is particularly pronounced in the service sector amid a recovery driven by inbound tourists and pent-up domestic demand. About 75% of Japanese hotel operators reported a shortage of full-time employees in late April, according to a Teikoku Databank survey.

To make up for the lack of workers, companies have been boosting investment in digitalization. Recent data suggested solid business spending had played a role in Japan’s economy expanding faster than expected in the first quarter.