Japan's Economy: Tight Labor Market Restricts Wage Growth Despite Drop In Unemployment

Japan’s unemployment rate fell to a two-decade low in October, according to data released Friday. However, as tight labor markets restricted wage growth, consumer spending also dropped, dragging inflation down for the third consecutive month and underscoring a key challenge that Prime Minister Shinzo Abe faces in kick-starting the country’s long-suffering economy.

Government data released Friday showed that the jobless rate fell to 3.1 percent in October from 3.4 percent in September -- hitting its lowest level since 1995. However, this did not translate into a concomitant increase in wages and consumer spending, which fell 2.4 percent over the same month a year earlier, against the forecast of a 0.1 percent rise. Average incomes also fell 0.9 percent, indicating that employers are hiring more workers for lesser pay.

“Job offers are surging but the average sum each employee is earning isn’t rising much. That's why household income isn't increasing and consumption remains weak,” Taro Saito, a senior economist at NLI Research Institute, told Reuters. “It's quite difficult to generate a positive economic cycle just by applying political pressure on companies.”

Meanwhile, household spending fell 2.4 percent in October from a year earlier, while the core consumer price index, which excludes volatile food prices but includes oil costs, fell 0.1 percent -- dropping for the third consecutive month.

In the three-month period ending Sept. 30, the GDP of the world’s third-largest economy shrank for the second consecutive quarter, marking a technical recession, which is defined as two consecutive quarters of negative growth. Additionally, Japan’s exports slid 2.1 percent from a year earlier to 6.544 trillion yen ($52.9 billion) in October -- the first decline since August 2014.

The run of weak economic data has not only cast doubts over the Bank of Japan’s outlook that a solid economic recovery will accelerate inflation to its 2 percent target by early 2017, it has also raised questions over the viability of the much-touted “Abenomics” approach to recovery, which involves pumping large quantities of cash into the economy to boost spending.

Also on Friday, Abe announced that his government will roll out an additional spending package, which local media reports pegged at over 3 trillion yen ($24.5 billion), to revamp growth. The amount is likely to be finalized in December.