Labour Shortages Push BOJ Towards Higher Interest Rates

The Bank of Japan (BOJ) is attributing weak economic activity to chronic labour shortages rather than stagnant demand. As labour constraints contribute to wage-driven inflation, the BOJ is likely to consider raising interest rates further. This shift represents a departure from previous deflationary battles.

The Bank of Japan is shifting its focus from stagnant demand to chronic labor shortages as the primary reason for Japan's weak economic activity. This change may lead the central bank to lift interest rates further than initially anticipated.

Business sectors across Japan are struggling to reach full capacity, not due to a lack of customers but because of a shortage of workers, a concern echoed increasingly by the central bank. The tight labor market, though not new, is prompting the BOJ to prioritize addressing inflationary pressures over economic weakness.

Recent reports and BOJ statements indicate that sustained wage hikes, driven by labor shortages, are building a case for steady rate increases. This marks a significant shift from previous strategies aimed at combating deflation through aggressive monetary policies.

(With inputs from agencies.)