(Bloomberg) -- Japan's jobless rate of 2.8 percent is easily the lowest among the Group of Seven leading industrialized nations and undoubtedly the envy of many more. But it symbolizes Japan's challenges as much as its successes.
The number of unemployed in Japan fell in February to the lowest since 1994, reflecting a shrinking workforce that is driving a labor shortage as Japan's population ages and shrinks. Prime Minister Shinzo Abe has enjoyed some success in getting more people into jobs, including married women and seniors, but many of them only work part-time.
It all adds up to a disconnect, so far, between the unemployment rate and pressure on wages and inflation, one that is limiting domestic consumption and leaving exports to carry a bigger growth burden. The nation's core inflation gauge clocked in at just 0.2 percent in last month, while a leading indicator of prices in Tokyo in March actually fell, by 0.4 percent.
The lower jobless rate isn't leading to higher wages because companies are hiring people on "poor terms," said Hiroaki Muto, chief economist at Tokai Tokyo Research.
"In theory, the narrowing supply-demand gap and falling jobless rate decide wages, but in the Japanese economy nowadays, productivity and growth potential rate are dictating wages,” Muto said.
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To be sure, an inflation rate of 0.2 percent is a good sign after prices went into retreat last year, yet it's still far from the 2 percent target and Bank of Japan Governor Haruhiko Kuroda has said the trend isn't strong enough.
Many economists expect nationwide core inflation to rise near 1 percent later this year, but cite higher energy prices as the primary driver. There is little sign of sustainable inflationary pressures, with weak wage gains seen during spring negotiations between Japan's biggest employers and unions indicating that consumer spending will likely remain subdued.
Household spending declined a worse-than-expected 3.8 percent in February.
Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co., said the drop was magnified by an extra day for the Leap Year in February 2016.
"Stripping it out, household spending wasn't as bad as the headline figure showed," Kodama said. "Private consumption is recovering, but the pace of the rebound continues to be slow. Given tepid growth in wages, any recovery in consumption looks dull."
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It's a recovery in exports that will play a key part in what is expected to be a fifth straight quarter of growth during the first three months of the year. Industrial production rose 2.0 percent in February from the previous month, as output touched the highest level in three years.
Kuroda has warned that he'll need solid evidence of underlying inflation before raising a key long-term interest-rate target.
Rising concerns about Donald Trump's ability to implement his pro-growth strategy have strengthened the yen over the past two weeks, underscoring uncertainty in the outlook for inflation and growth in Japan.
Expectations that the BOJ will start tightening before long are premature, Marcel Thieliant, senior Japan economist at Capital Economics, said in a note on Friday. He said the jump in industrial production and a small gain in "core" household spending, which strips out certain items, indicate Japan's economy continued to record solid growth during the first quarter.
"We believe that the bank will want to see much stronger evidence that price pressures are strengthening before it decides to withdraw stimulus," Thieliant said.
--With assistance from Keiko Ujikane
To contact the reporters on this story: Henry Hoenig in Tokyo at hhoenig@bloomberg.net, Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.
To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net.
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