Ueda Expects Tight Labor Market To Keep Upward Pressure On Wages

Bank of Japan Governor Kazuo Ueda said he expects a tight labor market to keep upward pressure on wages, reflecting his view that stable inflation is set to take hold. 

“Wage growth is spreading from large enterprises to small and medium enterprises,” Ueda said Saturday in remarks at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming. “Barring a major negative demand shock, the labor market is expected to remain tight and continue to exert upward pressure on wages.”

Ueda’s remarks are likely to support growing market speculation of another interest rate hike this year, although he didn’t directly discuss monetary policy in his presentation. The BOJ has identified Japan’s labor shortage as a key factor in driving up inflation via wage growth. 

Bets on another hike were already on the rise in recent weeks, fueled by elevated price pressures and steady economic growth. Earlier this month, US Treasury Secretary Scott Bessent took the unusual step of suggesting the BOJ is mishandling its fight against inflation, saying in an interview with Bloomberg TV that “they’re behind the curve.”

Data Friday showed that consumer prices excluding fresh food rose 3.1% from a year earlier in July, topping economists’ forecasts and staying well above the BOJ’s 2% target even as price growth moderated. 

The Jackson Hole conference focused on the labor market this year. Ueda said that the entry of more women into full-time jobs could help address the labor squeeze created by Japan’s aging population and low birth rate. Only around 50% of women in employment are full-time workers, compared with around 80% for men.

Ueda also noted that while foreign workers made up just 3% of Japan’s labor force, they accounted for more than half of labor force growth from 2023 to 2024.

Japan’s population dropped for a 14th straight year in 2024, according to the Ministry of Internal Affairs and Communications. Japan also has one of the oldest populations in the world, with almost 30% of residents 65 or older.

Ueda said a number of factors had masked demographic pressures in recent years, including years of zero inflation, economic stagnation and structural policies aimed at stimulating labor supply.

Participation rates, he said, had increased, particularly for women and seniors, meaning there was less scope to add significant numbers of people to the overall workforce. 

Japan’s jobless rate stayed at 2.5% for a fourth consecutive month in June, matching the average rate over the past three years. About three quarters of Japanese businesses cited retaining workers as a reason to raise wages, according to a survey released in February by the Teikoku Databank. 

Annual consumer price increases in Japan have hovered at or above the BOJ’s 2% target for more than three years. Ueda has defended his gradual approach to tightening by emphasizing that underlying inflation is still below the bank’s goal when examined in a comprehensive manner. 

The market isn’t convinced. Owing partly to increasing expectations for a hike, the benchmark 10-year bond yield hit the highest level since 2008 Friday. 

The BOJ has frequently reiterated that it will keep raising borrowing costs if its economic outlook materializes. Ueda, a former economics professor turned central bank governor, ditched the world’s last negative rate policy and the bank’s yield curve control in March last year, backing away from a massive monetary easing program that ran for more than a decade.

The BOJ now expects price trends will be in line with its goal sometime between October next year and March 2028, or the second half of its three-year projection period. It has, however, stressed high uncertainty due to the unknown impact of US trade policies.  

In a speech Friday, Federal Reserve Chair Jerome Powell opened the door to a cut in September, spurring the yen to surge 1% against the dollar as investors anticipate the rate gap with Japan will narrow.   

Ueda was making his second appearance at the Jackson Hole conference. He skipped the gathering last summer after being called into parliament to explain the bank’s decision to hike rates in July 2024, a move that contributed to global financial ructions after it caught some traders by surprise.