In the context of a gradually tightening labor market, Japan has taken significant steps toward achieving its 2% inflation target. The Bank of Japan recently predicted that wage and price increases could exceed expectations due to the tightening labor market. The BOJ’s quarterly report highlighted that service sector companies are more inclined to raise prices to offset rising labor costs. Additionally, the tight job market could lead to higher-than-expected wage levels, further fueling inflation and raising long-term inflation expectations.
Notably, Japanese companies typically adjust service prices in the new fiscal year every April and again in October. The BOJ noted that in April, more companies in the service sector raised prices due to rising labor costs. The focus now shifts to observing how widespread and sustained these price adjustments will be in October.
On July 31, the BOJ unexpectedly raised interest rates, signaling a shift towards more aggressive stimulus measures, as it recognized that Japan is nearing the achievement of its long-term 2% inflation target. The BOJ maintained its view from April, predicting that inflation will stabilize at around 2% in the coming years.
For Japan to achieve its 2% inflation target, collective efforts are still needed. This means that the government, businesses, and society must work together. Improving Japan’s current situation will require boosting labor productivity through technological innovation and training to enhance workers’ skill levels, which will help offset the impact of rising labor costs and reduce the pressure on companies. The government can also take measures to stabilize prices, such as lowering import tariffs and improving energy efficiency, to ease inflationary pressures. Additionally, structural reforms can be promoted, such as improving labor market flexibility, increasing public service efficiency, and advancing industrial upgrades to enhance the economy’s potential growth capacity.
