Japan's job market ate

Japan's labor market tightened in September, indicating that businesses are facing ongoing pressure to raise wages ahead of the Bank of Japan's (BOJ) policy meeting this week. A report from the Ministry of Labor on Tuesday showed that the job-to-applicant ratio in August edged up slightly from 1.23 to 1.24, representing 124 job opportunities for every 100 job seekers. Economists had previously forecast that the index would remain at the 1.23 level. This is a positive signal for the BOJ.

Another report from the Ministry of Internal Affairs and Communications showed that the unemployment rate in September fell to 2.4%, the lowest level since January. The number of employed individuals increased by 270,000 compared to the same period last year, while the number of unemployed individuals decreased by 90,000.

As the BOJ prepares for its policy meeting this week, a tight labor market is a positive environment for the central bank. Higher market demand for workers will force businesses to raise wages to retain employees, which could drive a virtuous cycle between prices and wages, a goal the BOJ is seeking when considering the next rate hike.

Nomura Securities economist Kengo Tanahashi said, "The job market will continue to exert upward pressure on wages," adding that this is part of the puzzle that allows the BOJ to claim it is on track to achieve its forecasts.

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Although most economists expect the BOJ to raise rates again in December or January, the market widely expects the central bank to keep rates unchanged on Thursday. BOJ Governor Haruhiko Kuroda said last week that the central bank has time to consider its next policy measures, implying no rate hike in October, despite the yen falling to a nearly three-month low. In the latest Bloomberg survey, almost all economists expected the decision to remain on hold, while half of the economists expected action in December.

At the end of the two-day meeting, the BOJ will also release its latest economic outlook report. In the July edition, the bank noted that an increase in labor force participation by women and the elderly during the economic recovery would tighten the labor market. Tuesday's report showed that the number of female workers increased by 430,000 compared to the same period last year.

These positive data come after Prime Minister Shigeo Ishikawa and his ruling party suffered a crushing defeat in last Sunday's House of Representatives election. Shortly after the vote, Ishikawa said he needed to implement a meaningful economic package and compile a supplementary budget. He said these measures would include supporting small and medium-sized enterprises to raise wages and adopt labor-saving technology.

A stable job market will also have a positive impact on wage negotiations for next year, which began earlier this month. Japan's largest labor organization, Rengo, said it would maintain its goal this year to demand at least a 5% wage increase in future negotiations.

This year, the group received a 5.1% pay raise, the highest in 33 years. Some companies, including Suntory Holdings, have indicated they will strive for a similar pay raise this year, marking a positive start to the next round of negotiations.

Meanwhile, Japan's labor shortage is becoming increasingly severe, especially among small and medium-sized enterprises. In the six months through September, the number of bankruptcies in Japan hit the highest level since 2013, with about 163 of the 4,990 bankrupt companies citing labor shortages as the reason for their collapse. Rengo announced that they would seek at least a 6% pay raise for small businesses, a target that could further squeeze corporate profit margins already squeezed by inflation.