Analysis: BOJ's fresh take on labour crunch opens door for more rate hikes
06/02/2025 22:00
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BOJ shifts focus away from output gap, towards labour
shortage
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Board debated wage pressure, stagflation risk at January
meeting
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Markets re-assessing view on how far BOJ could raise rates
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Hike to 1% only reaches bottom of estimated neutral rate
range
By Leika Kihara
TOKYO, Feb 7 (Reuters) - The Bank of Japan is
increasingly blaming chronic labour shortages, not stagnant
demand, as the main reason for its weak economic activity, a
justification it may use to lift interest rates beyond what was
initially expected.
From factories to hotels to restaurants, Japanese businesses
are struggling to hit full capacity not because they can't find
customers but because they can't find workers, goes the
commentary now emerging more from the central bank.
While the tight labour market is not a new trend, the BOJ's
more vocal concerns about the resulting wage and inflationary
pressures mean it will be more inclined to look past economic
weakness as it considers raising interest rates further,
analysts and policymakers say.
"My view is that ... the output gap is already in positive
territory in reality and the lack of supply capacity is exerting
upward pressure on prices," Naoki Tamura, a hawkish BOJ board
member, said on Thursday.
On paper, Japan's output gap, which measures whether the
economy is running at its full potential, remains slightly
negative, suggesting demand lacks momentum to ignite inflation.
Coupled with soft consumption, it has been seen by analysts as a
factor that could discourage the central bank from raising
borrowing costs too much.
But BOJ policymakers are challenging that narrative.
A close look at the BOJ's quarterly outlook report published
in January shows the bank turning more attention to growing
signs wage-driven inflation is taking hold due to chronic labour
shortages, in turn building the case for sustained, steady rate
hikes.
In that report, the BOJ said a dwindling pool of female and
elderly workers meant labour market conditions are tightening
even amid subdued economic growth.
"In this situation, upward pressure on wages and prices is
likely to be stronger than suggested by the output gap, given
that firms in many industries have started to face labour supply
constraints," the report said.
The report also analysed how labour-intensive sectors such
as construction and services were facing serious worker
shortages that were curtailing activity.
The BOJ's increasing focus on wage-driven inflation is
another sign Japan is shedding its 25-year battle with deflation
and economic stagnation. It also contrasts with former Governor
Haruhiko Kuroda's insistence on using radical stimulus to fire
up inflation.
"The BOJ is becoming more convinced that wages and services
prices will keep rising," said former BOJ top economist Seisaku
Kameda, who is now executive economist at Sompo Institute Plus.
"Its report, the language of its policy statement and the
governor's comments all back up the case for more rate hikes."
Mindful of the risk of an inflation overshoot, BOJ board
members debated the chance of further interest rate hikes even
after raising short-term rates to 0.5%, a summary of opinions at
the January meeting showed.
One opinion cited labour shortages as keeping inflation
elevated, while another warned of the risk of "stagflation,"
where high inflation and low growth co-exist, the summary
showed.
The BOJ's hawkish tilt means markets may put greater focus
on the bank's language around wage-driven inflation, rather than
its views on consumption.
"The BOJ is becoming increasingly mindful of how labour
market conditions could be putting upward pressure on wages and
prices, more than what its output gap estimate suggests," said
Ryutaro Kono, chief Japan economist at BNP Paribas.
"While the initial factor may have been the weak yen, the
BOJ is beginning to recognise the risk of price rises turning
into home-made inflation," he added.
PERSISTENT PAIN
Japan's rapidly ageing population has led to a dwindling
pool of workers. The country faces a deficit of 3.4 million
workers by the end of this decade and 11 million by 2040,
according to a 2023 study by Recruit Works Institute.
Kushikatsu Tanaka Holdings, which runs a restaurant chain
nationwide, is among retailers suffering from chronic labour
shortages, particularly in regional areas.
"It's not as if we're suddenly facing shortage of staff -
it's a permanent issue," an executive of the company told
Reuters.
"In regional areas, it's not even about hourly pay. There's
a lack of people in the first place. We're trying to consolidate
our outlets and shut those that are proving unprofitable."
Keen to retain workers, Japanese companies agreed to an
average 5.1% wage hike in 2024, the biggest increase in three
decades, a union survey showed.
In his speech on Thursday, BOJ board member Tamura said
labour shortages were forcing hotels to reduce occupancy rates
and meant some taxi operators had more cars than drivers.
As central banks have no power to address supply
constraints, their mandate remains squarely on combating
subsequent inflationary pressure by raising interest rates.
With stubbornly high raw material costs and labour shortages
keeping inflation above the BOJ's target for nearly three years,
markets are now re-assessing their view rates won't rise too
much.
Governor Kazuo Ueda said last month the BOJ's policy rate
was still distant from levels deemed neutral to the economy,
leaving scope for several more rate increases.
BOJ staff estimates Japan's nominal neutral rate to be in a
range of 1.0% to 2.5%. Having seen Japan's prolonged struggle
with deflation, many analysts had bet the highest the BOJ could
hike would be up to 1%. But building inflationary pressures may
reduce the chance the BOJ will pause there.
Growing market expectations that the BOJ's terminal rate
could be higher have helped lift Japanese government bond yields
to multi-year highs and propped up the yen.
"There's no reason why markets should assume that rates
won't rise beyond 1.0%, which is the bottom of the estimated
range," said a source familiar with the bank's thinking.
($1 = 152.2700 yen)
(Addition reporting by Makiko Yamazaki; Editing by Sam Holmes)
((leika.kihara@thomsonreuters.com; +813-6441-1828; Reuters
Messaging: leika.kihara.reuters.com@reuters.net))