Japan's unemployment rate to remain unchanged in July

Japan's unemployment rate is expected to remain unchanged at 3.4% in July. The number of job seekers that dropped out of the labour force increased in March and April, and these job seekers returned to the labour force in May and June. Most of them were absorbed by the increase in employment numbers. Both the manufacturing and non-manufacturing sectors are feeling the labour shortage and are stepping up hiring. 

The unemployment rate is expected to continue to remain below 3.5%, corresponding to the NAIRU level. This in turn should underpin sentiment just as aggregate wages start to expand, thus enabling Japan to make a full exit from deflation. However, if this situation fails to materialise, the BoJ's 2% price stability target will be difficult to achieve.

The unemployment rate needs to fall below 3% for the target to be met, but this level currently seems very far away. The job-to-applicant ratio is likely to rise further to 1.20 in June from 1.19 in June. This is the highest level since 1992 and indicates that companies remain willing to increase their hiring.