Japan’s Economic Growth Faces Uncertainty Amid Labour Shortages
The latest data from Japan’s service sector paints a concerning picture, with sentiment worsening and bankruptcy cases on the rise. This trend casts doubt on the Bank of Japan’s (BOJ) optimistic view that the country is on track to meet its 2% inflation target, driven by robust domestic demand.
Labour Shortages Constrain Growth
Some BOJ board members have expressed concerns that intensifying labour shortages could limit growth, rather than lead to higher wages. One member noted that there’s a risk Japan’s economic growth will slow if labour supply constraints force firms to shrink operations by withdrawing from low-profit businesses.
Service Sector Sentiment Deteriorates
The “economy watchers” survey, a key indicator of household spending and the broader economy, shows that an index measuring sentiment among service-sector firms like taxi drivers and restaurants stood at 47.5 in October, down 0.3 point from the previous month. This marks the second straight month of declines. A gauge of firms’ sentiment on the economic outlook also fell 1.4 points to 48.3, worsening for the second month.
Corporate Sentiment Worsens
Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute, notes that corporate sentiment remained strong for a long time but seems to be worsening. This raises questions about whether rising wages will boost consumption and lift service-sector sentiment, as the BOJ predicts.
Bankruptcy Cases Increase
Corporate bankruptcy cases are also on the rise, with 925 companies going bankrupt in October, the second-largest number this year. This represents a 17.1% increase from year-before levels. A record 287 cases were caused by trouble hiring staff, indicating that some firms are struggling to earn enough profits to pay higher wages.
BOJ’s Policy Under Scrutiny
The BOJ exited a radical stimulus programme in March and raised its short-term policy rate to 0.25% in July. Governor Kazuo Ueda has stated that the central bank will continue to raise rates if robust domestic demand, backed by higher wages, keeps inflation sustainably around its 2% target. However, the latest data raises concerns about the effectiveness of this policy.
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