BOJ highlights increasing wage pressure due to structural changes in labor market By Reuters

By Leica Kihara

TOKYO (Reuters) – Japan’s shrinking working-age population is leading to structural changes in the labor market that are increasing pressure on firms to raise wages and service prices, the Bank of Japan said in two research papers published on Tuesday.

The findings support the central bank’s argument that widespread inflationary pressures warrant a steady increase in interest rates from current near-zero levels.

Wages for permanent employees have remained stagnant, even as labor shortages have intensified since the mid-2010s, as female and older workers have filled the gap by taking low-paying part-time jobs.

The trend is changing as a decline in the number of female and older workers, the number of growing jobs and an increase in wages for part-time jobs prompts firms to raise wages for permanent workers, the BOJ said in a research paper on the Japanese labor market.

“Labor shortages trigger changes in companies’ wage-setting behavior,” the paper said. “The scope for additional labor supply is likely to gradually shrink, which is seen to keep upward pressure on wages.”

Such wage pressure is starting to replace commodity costs as the main driver of inflation, the BOJ said in another research paper on Japan’s service sector prices.

Services, from English lessons to tuition to massages, have seen prices rise as labor costs continue to rise, the paper said.

“With rising wage pressures, the pricing behavior of companies is changing” and supporting service sector prices, which have hovered around zero since the late 1990s, it said.

The BOJ ended negative interest rates in March and raised short-term borrowing costs to 0.25% in July, believing that a solid economic recovery will sustainably keep inflation at its 2% target.

BOJ Governor Kazuo Ueda said the central bank will continue to raise interest rates if economic growth and inflation align with its forecasts.