Japan’s labor market continued to show tightness in September, according to data released by the Ministry of Internal Affairs and Communications and the Ministry of Health, Labour and Welfare on October 29.

The unemployment rate fell to 2.4%, down from 2.5% in the previous month, while the job-to-applicant ratio rose to 1.24 from 1.23, highlighting persistent labor shortages in the Japanese workforce.

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Japan’s largest labor union, Rengo (the Japanese Trade Union Confederation), also announced its intention to seek a 5% wage increase in next year’s negotiations, following a record 5.1% raise this year—the largest in 33 years.

This tight labor market offers a relatively positive signal for the Bank of Japan (BOJ), which has long aimed to support moderate inflation through real wage growth as part of its strategy to normalize monetary policy.

In March, the BOJ raised rates for the first time in eight years, ending its negative interest rate policy and yield curve control. In July, it raised rates again, suggesting it would consider further hikes if inflation met expectations.

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While these comments initially triggered significant market volatility, the BOJ has since clarified that it would avoid rate hikes during periods of economic instability, aiming to calm market concerns. Nevertheless, its commitment to policy normalization remains clear.

The market broadly expects the BOJ to hold rates steady in October, with further rate hikes possible in December or January.

The Federal Reserve released the minutes of the July FOMC meeting on August 21, providing insight into the views of Fed officials on the current economic conditions and outlook:

Inflation: Inflation has eased compared to a year ago, with core PCE rising 2.6% year-over-year in June. Although still above the Fed’s 2% target, recent data have given Fed officials confidence that inflation is on track to reach the target, supported by factors such as slowing economic growth, weakened pricing power among businesses, and reduced household savings. Many officials noted that as the labor market rebalances, wage growth has continued to slow, which should further translate into a decline in core non-housing services inflation. Some officials also noted that the decline in new tenant rents is likely to have a delayed impact on housing services inflation, leading to the continuous moderation of housing services inflation

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Employment: The labor market is currently strong but not overheating. While the unemployment rate has been rising slightly since April, it remains at historically low levels. Some officials believe that job growth may be overestimated, as several officials pointed out that various indicators suggest the labor market is continuing to slow, with declines in hiring rates and job openings. Others also indicated that the rebalancing of the labor market has been partly supported by an increase in labor supply, particularly due to rising labor force participation rates among those aged 25 to 54 and an increase in immigration.

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Policy Outlook: With inflation continuing to decline, most officials believe that if inflation continues to fall as expected, it would be reasonable to consider easing monetary policy at the next meeting. Many officials see increasing risks to the employment target, warning that if the labor market slows further, it could lead to more significant deterioration. All officials agreed on the necessity of rebalancing and closely monitoring the risks associated with the dual mandate of price stability and maximum employment.

Overall, with inflation steadily decreasing and potential risks of labor market deterioration, the Fed has signaled a leaning toward a rate cut in September. Additionally, the U.S. Bureau of Labor Statistics on August 21 revised down the nonfarm payrolls by 818,000 from April 2023 to March 2024, meaning that the average monthly nonfarm payroll increase for this period will be revised down from 242,000 to 174,000, confirming the possibility that employment growth had been overstated. The market currently expects a total of 100 basis points in rate cuts throughout 2024 (25 basis points in September, 50 basis points in November, and 25 basis points in December).

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(Photo Credit: Federal Reserve)

The U.S. Department of Labor released data on August 8th showing that initial jobless claims for the previous week stood at 233,000, a decrease of 17,000 from the revised figure of the prior week, and better than the market expectation of 241,000. The four-week moving average was 240,750, an increase of 2,500 from the previous week’s revised average of 238,250.

Meanwhile, continuing claims reached 1,875,000, an increase of 6,000 from the revised figure of 1,869,000 from the prior week.

Amid last week’s weak manufacturing PMI and employment situation data, the market was gripped by fears of an impending economic recession. However, these concerns eased somewhat with the better-than-expected service PMI and jobless claims data. According to FedWatch, the probability of a 50 basis point rate cut at the September FOMC meeting surged from 11% to 85% within a week, before falling back to 56%. It is expected that the market will be highly sensitive to any labor market data leading up to the September FOMC meeting. Therefore, close attention should be paid to whether the job market deteriorates in the coming weeks.

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