Japan's Unemployment Rate Rises to Highest Level in Over a Year Amid Labor Market Shifts

Japan's unemployment rate has climbed to its highest point in more than a year, indicating a mild easing in the labor market amid discussions about a potential Bank of Japan rate increase in the coming months.

The Ministry of Internal Affairs reported on Friday that the unemployment rate increased to 2.6 percent in August from 2.3 percent in July, surpassing economists' median forecast of 2.4 percent. Complementary data from the labor ministry revealed a decrease in the job-to-applicant ratio to 1.20 from 1.22. While this still represents 120 job openings for every 100 job seekers, it marks the lowest number of available positions since 2022.

"The robust labor market appears to be losing momentum," noted Masato Koike, Senior Economist at Sompo Institute Plus. "Trump tariffs are resulting in fewer employment opportunities, initially affecting part-time positions but now extending to full-time roles as well."

Despite August's data showing a slight cooling in the job market, the overall trend still indicates strength amid an ongoing labor shortage. This persistent shortage has compelled companies to raise wages to attract and retain employees, contributing to sustained wage growth. Consistent wage increases alongside steady inflation remain crucial factors for the BOJ to maintain its gradual tightening approach.

The BOJ board will announce its next policy decision on October 30, with increasing market expectations for a rate hike. Following dissent from two board members against last month's rate hold and hawkish communication even from traditionally dovish members, more traders are anticipating a rate increase at the end of the month.

In its most recent economic outlook report, the central bank observed that expanding the labor supply through women and elderly workers is becoming increasingly challenging. Friday's employment data revealed that the number of full-time female employees reached approximately 13.6 million in August, setting a record high for the second consecutive month since comparable data became available in January 2013.

Earlier this year, Japan's major corporations committed to wage increases exceeding 5 percent during annual labor negotiations, representing the steepest gains in over three decades. The country's largest labor union federation is expected to announce objectives for the next round of wage talks later this month, with focus on whether businesses can maintain this momentum despite concerns about a U.S.-led tariff war affecting corporate performance. The national minimum wage has also risen to unprecedented levels.

"The substantial increase in the minimum wage has generated upward pressure on compensation beyond market-driven levels," explained Sompo's Koike. "This could potentially have adverse effects on the overall labor market."

Chronic labor shortages have become a significant threat to business operations. According to Tokyo Shoko Research, 237 companies filed for bankruptcy due to labor shortages from January to August this year, representing a 22 percent increase from the same period last year. Many cited inability to meet rising wage demands as a contributing factor.

In response, numerous firms are turning to foreign workers. As of October last year, a record 2.3 million foreign workers were employed in Japan, filling vacancies created by the shrinking domestic workforce.

The growing presence of foreign residents and the influx of tourists are emerging as key political issues. All five candidates in the ruling Liberal Democratic Party's leadership race, including frontrunners Shinjiro Koizumi and Sanae Takaichi, have advocated for stricter regulations regarding foreigners. The leadership vote is scheduled for Saturday.

"Public sentiment may make it difficult to actively welcome more foreign workers, but there's also strong demand from industry," stated Sompo's Koike. "While the outcome of the upcoming LDP leadership race may influence policy direction, the country will likely move at least somewhat toward accepting more foreign labor."