Japan's jobless rate falls to lowest in 25 years

Tokyo

JAPAN'S tightest labour market in decades just got even tighter, driving companies to hire more workers in full-time, permanent positions. That's positive news for the Bank of Japan as it struggles to generate 2 per cent inflation.

Consumer prices in Tokyo, a leading indicator for the nation, rose more than expected after two months of slower increases.

The unemployment rate in May fell to 2.2 per cent (estimate 2.5 per cent), the lowest since 1992. The job-to-applicant ratio was 1.6 (estimate 1.59), the highest since 1974.

Prices in Tokyo, excluding fresh food, rose 0.7 per cent in June from a year earlier (estimate +0.6 per cent). Industrial production fell 0.2 per cent in May (forecast -1 per cent) from April, when it increased 0.5 per cent.

The employment data released on Friday point to stronger upward pressure on wages, which so far haven't responded as expected to the super-tight labour market.

As companies struggle to find workers, they're hiring more staff on permanent, full-time contracts, which generally means higher pay and benefits. A job-applicant ratio at a 44-year high also points in the right direction for wages and inflation.

Still, challenges to the economy abound.

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.

"Pressure to increase wages is, if not already strong, certain to get stronger," economist Yuki Masujima wrote. "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 per cent in May - far from the 2 per cent target."

However, the link between unemployment and wages isn't 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 labour unions are aware of the risk that something like the Lehman shock may happen again," Mr 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."

Atsushi Takeda, an economist at Itochu Corp, said: "Tokyo CPI was better than I expected. 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."

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 per cent (forecast +3.4 per cent), compared with a 2.6 per cent rise in April.

Output is projected to rise 0.4 per cent in June from May, and 0.8 per cent in July. BLOOMBERG